Fact Sheet
KPIs
Savings
37%
Addressed Spend
80.0m
Maverick buying
70%
Value Added
  • Complete spend and demand visibility and control over the approval process
  • Increased cost awareness, reduced maverick buying
  • Concrete action plan for cost optimisation

Contact

LinkedinXing
Florian Dederichs

Florian Dederichs

Founder & Partner

M.+49 160 93882573​

E.florian.dederichs@ocmconsulting.de

W.www.ocmconsulting.de​

Strategic Procurement of Pharmaceutical Raw Materials

A lack of ressources or know-how in specific product categories?​

  • High savings in each product category
  • Optimal quality & conditions

Procurement transformation of indirect costs in the renewable energy engineering sector

 

Companies in the renewable energy sector have had to face many challenges in recent years, among others in indirect procurement. Medium-sized companies in particular have been hit hard by rapid changes in the market.

The steady decrease in state subsidies and the introduction of new tender procedures are reducing revenues. At the same time, the market demands increased cost efficiency due to ongoing standardisation and technological developments, an effect which is further intensified by strong competition from Asia. Furthermore, the first generation of products is often located in the last third of their respective life cycles. Complaints due to design defects, signs of wear and tear, and incorrect service-life expectations are beginning to surface and are reaching the companies.

In addition to these external changes, many companies face increased pressure from investors or owners due to mergers, acquisitions, or changes in the ownership structure.

All of this is forcing many companies in the industry to cut costs throughout all procurement categories and increase efficiency, sometimes with survival at stake. The case described below shows a situation where our client experienced exactly these challenges – high external pressure due to structural market changes as well as increased earnings expectations due to the entry of a new investor. The case study of a 6-month client project demonstrates how through a holistic approach we were able to implement procurement transformation, achieve significant reductions of indirect costs, thus contributing to the sustainable competitiveness of our client.

 

The initial situation

 

The annual expenditure on the indirect procurement categories under consideration amounted to approx. 80 million euros, distributed over 12 different cost centres. Poorly functioning or non-existent approval processes and an inadequate procurement category and general ledger account structure led to a lack of transparency, high prices, and unmanaged spend.

Budgeting, the instrument of choice for controlling expenditure, also failed to fulfill its control and steering function due to a lack of data transparency. It was unclear who was spending how much, on what, and whether it was even necessary in the first place.

The particular challenge of the project was not only a lack of cost efficiency in general, but that cost reduction could not take place because the actual spend requirements of the respective cost centres were unknown. If the budget were to be split equally across all departments without differentiating accordingly, this would have inevitably led to considerable problems in day-to-day business.

 

The approach and problem solving

 

The first problem that had to be solved resulted from the lack of transparency in the system, as described above. Without a sufficient understanding of the cost approval processes, as well as budget and cost centre responsibilities, an effective procurement transformation initiative could not begin. In addition, categorisable information was needed regarding which cost centre spent how much and when in order to be able to assign the accountability for each euro spent. This was further complicated by the fact that the company did not have a clear and unambiguous general ledger account and procurement category structure or strategy.

The first step consisted of a data request sponsored and conducted on behalf of the CEO with the respective cost centre managers. In this way, information was collected on the "what" and "what for" for all expenditure. At the same time, cost responsible managers identified which of the indirect costs they considered to be critical, less critical and not necessary, as well as the consequences to be expected from not purchasing said item or service. For each identified cut, the managers were also asked to make suggestions as to what they would recommend as a replacement, if necessary.

Together with Controlling and Procurement, the resulting expenditure plans were then evaluated in terms of their savings potential and required budget. As a result, the planned budget could be adjusted in line with requirements and savings targets could be defined for each cost centre. The transparency achieved was the basis for identifying and initiating further cost reduction and procurement transformation measures.

The next step involved the preventive avoidance of "maverick buying" as well as indirect costs that went unmonitored in terms of content, budget, and procurement process. The analyses revealed inefficient and non-existent approval processes as the cause, which is why these processes were optimised and transferred to transparent workflows.

The newly developed approval processes included a technical, budgetary, and procurement check and, above a certain level of expenditure, approval by management. A semi-automated process was established on an ad hoc basis using predefined approval formats and guidelines communicated throughout the company, and invoices – and the associated suppliers - that fell outside of the now approved expense list were blocked (supplier blacklist).

Control over newly placed indirect costs could be gained within a few weeks.due to the newly gained transparency for management and the enforced compliance with 3 approval points (specialist department: necessity, finance: budgetary, procurement: price efficiency).

Following the savings targets identified in Measure #1, the cost centre managers were tasked with developing savings measures in coordination with Controlling and Procurement. The concepts developed were then presented in so-called cost centre workshops and, if approved, put into practice. The workshop participants were the CFO, the cost centre manager, the cost centre controller, and the buyer responsible for the cost centre.

The levers for increasing savings ranged from consolidating roles through in and outsourcing initiatives, specification changes, supplier negotiations, and price model changes. The measures adopted were monitored by Controlling and Procurement and the actual implementation of the new measures was ensured through a monthly PMO.

The final step was to ensure the long-term success of the new measures of the procurement transformation initiative and to prevent the situation recurring. To do this, future indirect costs had to be made measurable and controllable, and the processes automated.

The general ledger accounts and procurement categories were still disorganized. In this step, these were finally restructured and integrated into the new SAP approval processes and workflows. In cooperation with Procurement, Accounting, and Controlling, clear and comprehensive general ledger accounts, procurement categories, and cost centres were agreed and then implemented in the corresponding systems.

In addition, the approval processes in SAP were redesigned. Also, external workforce management software was selected and implemented for the freelancers and temporary workers category. Thus, processes became more efficient and workforce management outcomes could be significantly improved. Another result was the increased data transparency, which made budgeting more needs-oriented and improved the control of indirect costs.

 


 

Results and Conclusion

 

A holistic costs savings project approach achieved immediate results and paved the way for the medium-term procurement transformation of the organisation in terms of its management of indirect costs.

Out of approximately 80 million euros in annual indirect costs, the project enabled the company to save around 30 million euros. The greatly improved understanding of the spend allowed the company to manage its budget and expenses more sustainably in the future. The newly established approval processes ensured a careful review of expenditure in line with the company’s needs and objectives. Finally, the new procurement processes and tools for workforce management significantly improved performance, which ultimately led to more efficient procurement in terms of results and time allocation.

OCM offers comprehensive support in procurement transformation and the design of your procurement department.

We combine our proven approach for strategic category procurement and procurement optimisation to achieve quick, significant, and sustainable savings. We can examine your cost saving opportunities – for direct as well as indirect costs - and identify the measures that would fulfil them and therefore achieve your goals.

We would be delighted to present our approach and modules to you or to discuss concrete solutions based on your challenges.

Contact

LinkedinXing
Florian Dederichs

Florian Dederichs

Founder & Partner

M.+49 160 93882573​

E.florian.dederichs@ocmconsulting.de

W.www.ocmconsulting.de​

Procurement Consulting Modules

Case Studies

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