The concept of combining procurement with warehousing, distribution and freight management services is not new. So why are some logistics specialists convinced that the idea has come of age?
Part of the answer can be found in the recent development of the procurement outsourcing market in the UK and elsewhere. Still at a relatively early stage on its outsourcing curve, procurement therefore promises the prospect of substantial future growth for contractors.
Another reason can be seen in official UK government economic data. These show that the manufacturing sector accounted for less than 15 per cent of the total output of the UK economy in 2003 – down from 20 per cent in 1998. By contrast, the business and financial services sector contributed 31.7 per cent – up from 27.6 per cent just five years earlier.
Organisations have been waking up to what this relative decline in manufacturing means for procurement. Traditionally focused on supporting core production processes, procurement departments are finally turning their attention to non-core spend areas – such as promotional materials, consumables and spare parts.
These ‘indirect’ goods – so called because they are typically not resold – are often sourced in emerging markets, and represent the fastest-growing proportion of the spend of major organisations.
Many companies are finding that they have hitherto been focusing their purchasing efforts in the wrong place. Unless a business is a very large manufacturer, then the bulk of its costs are not likely to be in production at all. Today’s service or consumer goods companies are, in fact, more likely to have their biggest costs in marketing – followed by IT, property, HR and professional services.
The purchasing of such indirect goods and services has traditionally been devolved to production, HR or marketing departments – by-passing procurement professionals. However, where they were once seen as small-scale and difficult to manage, these areas are increasingly being viewed as important and highly amenable to outsourcing.
One-stop procurement and distribution
For this reason a new company, 4CX, has been created to provide large organisations around the world – but initially in Europe – with combined international purchasing and supply chain management solutions. In short, it is a global one-stop procurement and distribution shop, helping companies to source, move and deliver goods on time at the lowest cost.
Formed in July 2005 as a joint venture between Exel and 4C Associates – a leading specialist procurement consultancy – the partnership already manages an annual spend of over e100 million. It has offices in the UK, France, Greece, Ireland, Spain and Hong Kong, and the plan is to progressively roll out the service across continental Europe.
4C Associates was formed in 2000 and was born out of the recognition that noncore products and services can be complex and time-consuming to buy effectively. Its innovative and proprietary technology-based solutions can provide cost savings on procurement of typically 10-15 per cent – sometimes much more – and this has powered 4C into the vanguard of this new sector across Europe.
The key point here is that the business can deliver such savings across a big marketing spend, for example, without affecting the outcome. There is, of course, a huge difference between saving 15 per cent by not spending it, and saving 15 per cent by getting the same thing done for less.
Even over the past 12 months, the demand by organisations across Europe for support in global sourcing has grown dramatically. The company is now involved in the complete procurement process on behalf of many large household name organisations, from sourcing product to contract execution.
What is required is a detailed knowledge of every relevant procurement category – electronic products, glassware, print, plastics, etc. – and a structured approach that accurately identifies savings opportunities, and then ensures the savings are delivered… as well as locked-in for the long term.
Flexible global sourcing
The new joint venture, 4CX, lies at the intersection of Exel’s and 4C Associates’ expertise in creating value. Specifically, customers of logisticians outsource to reduce costs and enhance service levels throughout their supply chains, while clients of procurement specialists seek to derive savings in the purchasing of goods and services.
Where these processes meet, there is an opportunity to add further value. By outsourcing, customers can: gain more flexible global sourcing options; increase levels of transparency and control; obtain savings in both procurement and logistics; and help achieve other objectives – such as managing corporate social responsibility (eg through purchasing from reputable suppliers).
Exel has an enviable reputation for providing customer-focused, integrated freight management and contract logistics solutions to a wide range of industries – including retail, consumer, technology, automotive, healthcare, chemical and industrial – along with a variety of other value-added and specialist services. Customers include over 75 per cent of the world’s largest, quoted, non-financial companies, and operations span 2,050 locations in 139 countries.
Exel therefore already has the global network and customer base necessary to make a success of its new joint venture. It knows its customers’ supply chains inside-out, and will be pro-active in suggesting ways that organisations can improve efficiency by combining the outsourcing of logistics and freight management with specialised procurement services.
4CX’s initial focus will be on three key types of non-core products: promotional items/point-of-sale materials; goods not for resale (eg plastic carrier bags, store fixtures, posters); and maintenance, repairs and operations (MRO) – eg spare parts for production lines, which are often bought on an ad hoc basis.
Other areas for possible future consideration include workwear and packaging.
As we have seen, procurement of such indirect products has traditionally been done in a less than effective manner, while there is a clear requirement for them to be in the right place at the right time. A restaurant chain distributing ice buckets to celebrate the next World Cup Final, for example, will have to have them sourced and delivered to its outlets by 9 July 2006. One day late and the entire consignment would be so much scrap metal.
Driving up efficiency
It has been estimated that up to 50 per cent of marketing expenditure is ineffective. By driving up efficiency in the procurement and delivery of promotional merchandise, a significant improvement can be made to the value of each marketing dollar spent by major organisations across every sector.
Working closely with merchandisers on promotional activity, for example, 4CX can assist with: planning promotions; sourcing products from multiple locations (including, for example, China); moving product to European locations; storing product; delivering to outlets at the right time; and providing management reports on the effectiveness/quality of promotional items.
By taking a procurement-led approach to the end-to-end supply chain, it is possible to deliver significant cost-savings while effectively managing the risks associated with global sourcing. This represents a highly differentiated, if not totally unique, value-add proposition for customers and further underpins Exel’s developing supply chain management capabilities.
With proof of concept already under its belt, the development of 4CX is a key step for the company in terms of linking together the wider supply chain. It is not just about integrating procurement, freight management and contract logistics activities, but about developing new products and carving out new markets – combining relevant expertise from both sides of the business.
Jon Bumstead is Director of Strategy at Exel, and may be contacted at email@example.com
Delivering the benefits:
- significant and guaranteed savings through global, lowest-cost sourcing
and by leveraging aggregated buying power
- risk management, including corporate social responsibility, quality,
intellectual property (IP) protection, security of supply, lead time
- reduction in supply chain costs through optimising warehousing and
- simplified processes, with a single point of contact for all materials
- efficiency gains through the introduction of best-practice processes and
- a common view across all materials sourcing activities – enabling
knowledge-sharing between business units and projects