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Procurement Levers: Why price reduction is not enough for PIPE companies

Procurement Levers: Why price reduction is not enough for PIPE companies

PIPE (Principal Investors & Private Equity) companies have long identified procurement optimization as an effective means to create value for portfolio companies. In particular, its short-term effectiveness has proven to be a big advantage for PIPE companies. In INVERTO’s PIPE study, 33% of respondents agree that Procurement has the highest potential for value creation to the bottom-line. That being said, the way this is delivered can be greatly improved. Implementation is often completed superficially and there is significant value left on the table.

Exhibit 1: Ranking of bottom-line measures to sustain value-added within a portfolio company, INVERTO 2019 PIPE Study

 

Complex measures are often overlooked

The study finds that the majority of respondents rely on traditional strategies such as renegotiations and new tenders. More sophisticated or complex strategies such as technical specifications, global sourcing, or demand management are only being used by half of respondents, even though these levers have great potential.

Exhibit 2: Ranking of procurement levers’ potential for value creation in portfolio companies, INVERTO 2019 PIPE Study

 

Creating long-term, sustainable value through advanced Procurement levers

In order to truly deliver value through Procurement, delivering short-term price reduction opportunities is only half the solution. Exploiting advanced Procurement levers is the flip side of the coin and imperative to deliver long-term, sustained value.

As part of this article, I give 3  typical examples on how complex levers can be applied successfully:

1. Technical levers: Standardizing PPE products across different plants

To address Personal Protective Equipment (PPE) successfully, it is important Procurement has the mandate to challenge current specifications and this is communicated within the organization. Procurement must be in the position to lead initiatives and engage with departments and suppliers to find suitable alternatives.

With PPE such as gloves, helmets or masks being a particularly sensitive topic, engaging with internal stakeholders in Health & Safety, Production as well as representatives from the workers’ council is key. Procurement must be in the driving seat of these conversations and ensure the initiative is pushed forward in close alignment with relevant stakeholders. In simple terms, exchanging a glove for an equally suitable but more commercially attractive one, can generate savings of up to 70%.

2. Global sourcing: Switching to Indian suppliers for big bags

Most Procurement departments rely on local suppliers, with whom they are familiar and often have long-term relationships. There is a barrier to engaging with suppliers who are located further afield. Many organizations setup a global procurement office in an emerging market or may nominate a factory located in the area to bridge the gap.

Big bags or Flexible intermediate bulk containers (FIBC) are mainly produced in China or India with distribution networks in place to deliver to Europe and North America. These industrial containers made of flexible fabric are designed for dry, flowable products, such as sand, fertilizer, or granules of plastic. They are often used in the construction or mining industry.

In our example, costs for big bags could be reduced by 30% by switching to Indian suppliers compared to European suppliers. While previously local distributors were in place, the costs by procuring directly from the manufacturer were much more competitive. Just be mindful that in the decision making, logistics and warehousing are carefully planned and considered in order to create a fair comparison.

3. Demand Management: Implementing a webshop for MRO parts

Webshops or e-catalogues do not only make ordering quick and intuitive, they also provide a great level of control to Procurement enabling the management of the demand from stakeholders. As part of the setup, authorization and approval processes can be customized and specific products blocked or promoted to users. In addition, there is a full reporting which provides visibility to Procurement.

Maintenance, Repair & Operations (MRO) parts such as bearings, fittings, seals, gaskets etc. are particularly suited for implementation of an e-catalogue. The category comprises thousands of low value parts that need to be managed. In addition, technical stakeholders often rely on their experience in choosing parts and suppliers. A webshop has the power to channel the demand to one supplier and create transparency for Procurement to negotiate more effectively.

 

Conclusion: Step up the Procurement game to achieve 10-20% savings

Our examples show that also the more complex levers are neither mysticism nor wizardry, but claim an understanding of the demands required and expertise in setting up procurement strategies.

Due to the high number of other measures being taken and the focus on the top-line as well as the lack of capability and capacity within the portfolio companies, PIPE companies are leaving significant value on the table in implementing levers for Procurement optimization. Depending on the category, basic levers typically only achieve 3-5% savings while advanced levers can yield benefits of 10-20%. Basic levers such as supplier (re-)negotiations and tenders have often already been explored and will not allow the full potential being realized.

It is recommended that PIPE companies stop shying away from investing expertise and time to deliver potentials by applying advanced Procurement levers within portfolio companies. This will likely require organizational changes and could be kick-started by engaging external support.

To discuss how to deliver more value through advanced Procurement levers, please contact Thibault Lecat & Katharina Erfort regarding further questions.

 

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