Successful Cost Optimization Strategies for Manufacturing and Industrial Organizations

It’s not at all unusual for a manufacturing and industrial (M&I) organization to manage hundreds of tier-one suppliers, but that number can balloon to tens of thousands of suppliers across the value chain. These secondary and tertiary goods and services include everything from office supplies and IT services to utilities and professional consulting services. If not managed efficiently, these expenses — spread across many low-dollar transactions and thousands of different suppliers — can negatively impact an organization’s bottom line and profit margins.

This scenario is common in the M&I space, where some organizations are still using spreadsheets and disparate technology systems to manage procurement and have little or no visibility into their indirect spend. As a result, this tends to be a poorly managed, cost-intensive aspect of their growing businesses.

The challenges of indirect spend don’t end there. Procurement leaders in the M&I space are also dealing with a persistent labor shortage, continued supply chain disruptions, and increasing cybersecurity threats. All these challenges directly impact the indirect procurement process, which works best when simplified with a comprehensive solution that can integrate with your existing eProcurement infrastructure and be tracked using advanced data analytics.

Brent Heller, head of manufacturing and industrials at Amazon Business, said inflationary pressures are also taking a toll on organizations’ bottom lines. “As a result, they’re looking for ways to examine all aspects of their business, including indirect spend, which includes everything from materials to services to maintenance needs that fall outside of their main product offerings,” Heller said.

The Hidden Expenses Lurking Behind the Scenes

The opportunities to create efficiencies and save money in the indirect procurement arena are plentiful, but most organizations lack the data, platforms, and insights needed to be able to make these improvements. Instead, they settle for systems that promote fragmented spending, lack end-to-end visibility, and decentralize decision-making. But when organizations ignore the hidden expenses that are lurking behind the scenes, they wind up with poor visibility over indirect spend and missed opportunities for cost reduction.

These issues came to light in a recent Amazon Business survey of more than 3,100 procurement decision-makers and executive leaders around the globe. According to the survey, nearly half (44%) of those surveyed view “efficiency and complexity” as the top challenges they’re facing this year. To address these problems, 98% of respondents say they’re planning investments in analytics and insights tools, automation, and artificial intelligence (AI) for their procurement operations over the next few years.

Organizations are also being asked to diversify their supplier bases while finding ways to work more efficiently with each seller. According to the survey, 81% of respondents currently have internal or external mandates to purchase from different types of certified sellers, for example. This presents a double-edged sword for organizations that don’t have good control over indirect spend activities.

For many organizations, the logical solution is to work with a diverse ecosystem of sellers that transact from a single vantage point. For example, one construction organization with 8,000 employees and 20 regional offices was dealing with a high level of indirect spend and no real controls over those expenditures. What The Walsh Group needed was an enterprise-level view of spending that would help it save time and money while still enabling its teams to access what they needed when they needed it.

The Walsh Group was also dealing with untraceable spend and a disorganized approach to outfitting its job site trailers. For example, Jessica Richardson, accountant and travel and expense manager, noticed that employees were making business purchases with their personal retail memberships and credit cards, and even expensing the cost of retail memberships for their business buys. The organization also needed a way to streamline the purchases of IT equipment and furniture purchases for its jobsite trailers.

The Walsh Group set up an Amazon Business account that allows its administrators to consolidate business expenses, improve spend visibility, and gain access to millions of sellers to save time and money. “Amazon Business is a one-stop shop for our business buying,” Richardson said. “We were already using it before. Now it’s accessible to us with one enterprise account.”

Gaining Control Over Indirect Spend

Optimizing the indirect procurement process starts with consolidating data and using it to analyze spend patterns, market trends, and supplier behaviors. Then, organizations can use that information to make more targeted, data-driven decisions. The next step is to examine current supplier relationships and spend categories and the time, cost, and effort associated with each one. Consider which relationships provide the most value — likely just about 20% of them, based on the 80/20 rule — and consider a solution like Amazon Business to manage and track the rest.

"Amazon Business consolidates numerous vendors onto a single procurement platform for professional buyers," said Heller. "Those buyers can capitalize on their collective bargaining power with vendors, negotiate discounted bulk pricing, and then pass those savings on to customers purchasing through Amazon Business."

By working with Amazon Business, the organization was able to reduce existing inventory by 40%, improve procurement system performance, and save money on depreciating, unnecessary warehoused materials. “Amazon Business is part of a larger opportunity for bp to eliminate multiple contracts, enabling us access to a large number of suppliers,” said Justin Burnett, VP of materials management and warehousing at bp. “This prevents us from having to continuously manage individual contracts and negotiate price lists in the large tail of our spend.”

As bp learned, tail spend is one of the most overlooked aspects of the indirect space and comprises those infrequent, one-time purchases that can add up quickly when multiplied across the enterprise. Organizations can bring tail spend under control by using technology tools that guide employees on what to buy, where to buy from, and which suppliers to work with for specific products or categories. This also paves the way for more bulk-buying opportunities and potential discounts.

Getting Everyone on the Same Page

Regardless of the specific challenges that an M&I organization faces with its indirect procurement activities, Amazon Business offers the digital tools that procurement professionals need to better control spending, reach a more diverse group of buyers, and manage transactions from one place. In return, organizations can expect benefits like greater efficiencies, streamlined processes, and better pricing, all of which help boost the organizational bottom line.