PowerCo* urgently needed to revamp its global procurement strategy. The company trimmed procurement spending by 14% during a previous effort but despite these gains, PowerCo's financial performance remained mixed. When a private equity firm acquired PowerCo, the new owner aggressively pursued additional purchasing savings in preparation for a sale, but PowerCo had already captured the easy wins.
PowerCo's senior management needed to identify cost reductions that would boost profitability in the current fiscal year. Like most companies, procurement represented a major savings opportunity since it typically is the single largest cost item. Extracting those savings often proves challenging due to limited spending transparency. PowerCo needed to not only enhance short-term profits but also develop a global purchasing strategy for long-term savings.
Working closely with the CEO, Bain performed an in-depth diagnostic to identify full savings potential, including opportunities for quick wins and critical enablers for sustainable results to develop PowerCo into a world-class purchasing organization. Bain's diagnostic included:
- Identifying 350 cost-saving initiatives and aligned with key stakeholders. Diagnostic revealed 11% total savings potential by identifying all applicable savings levers including standardizing more components and increasing reliance on low-cost global sourcing.
- Implementing initiatives in waves. Develop aligned and prioritized initiatives for each category, linking success of savings realization to Bain fees.
- Improving purchasing capabilities and building purchasing enablers. Develop regional sourcing organizations and improve training and negotiating skills.
- Building project management office. Installation of rigorous monitoring to track savings and financial impact as well as the development of purchasing enablers.
Based on findings from the comprehensive diagnostic, we proposed that senior management launch a series of initiatives to systematically reduce purchasing costs.
- Substantially invest in appropriate negotiation preparation. Arm negotiators with supplier cost analysis, pricing information and role play negotiations to gain an edge with existing suppliers.
- Adopt a global sourcing strategy. Identify international suppliers with substantial structural cost advantages.
- Limit dependency on single suppliers. Tightly define specifications for request for proposals and develop alternative sourcing options.
- Define clear process for supplier approval. Streamline end-to-end supplier approval process and increase testing efficiency.
- Track savings implementation and financial impact; install proactive program management with mitigation plan. Create transparency on realized results and undertake countermeasures if required.
With a clearly defined global sourcing strategy and action plan, senior management achieved the company's aggressive savings target for the fiscal year, re-positioning PowerCo as a strong financial performer. The initiatives delivered:
- Cost savings of €31 million in the first twelve months.
- An additional €21 million in savings over the next six months.
- 11% reduction of purchasing cost over 18 months.
- Required changes in purchasing capabilities and implemented enablers.
- Lower-cost contracts with existing suppliers while also striking deals with new suppliers.
- Redesigned components to reduce cost.
- Increased control through improved negotiations.
- Top management support for big-ticket savings.