SCDigest editorial staff

The News: Colgate-Palmolive announced it had signed a major procurement outsourcing contract with IBM for indirect and certain packaging materials.

The Impact: Procurement is the latest function to be subject to corporate outsourcing. Though still a relatively rare, most experts believe it is gaining momentum and will see rapid growth in coming years. The primary action thus far has been in indirect (non-manufacturing) materials. A big question is how effectively the practice can also work for direct materials.

The Story: Consumer goods giant Colgate-Palmolive has signed a seven-yea agreement with IBM for outsourced procurement services for certain indirect goods and services and some packaging materials. IBM will also provide accounts payable services for the company in Europe and North America.

The announcement is another element in the broad restructuring plan that Colgate announced in 2004 to reduce costs and increase market responsiveness. The company estimates the deal will save the company about $30 million by 2008.

How do these savings materialize? According to Dave Duray, leader, Business BTO at IBM, companies outsourcing procurement functions typically drive savings and efficiencies from some or all of the following:

• Consolidation of spend across functions, business units and geographies
• Advanced procurement technologies that can drive efficiencies in administration and spend consolidation
• Negotiation of better market pricing
• Improve spending “compliance” – reduction in “maverick” spend, or purchasing goods not on contract with suppliers.

In fact, many companies do not have a clear indirect procurement organization, leading to a lack of overall controls.

There is a growing interest in procurement outsourcing across corporations. The Colgate deal is the third recent procurement outsourcing win for IBM, coming after similar announcements with consumer good company Unilever and electronics contract manufacturer Solectron.

Under the deal, Colgate will still manage most of the procurement for important raw materials and other goods used in its manufacturing processes. In general, these goods at harder to outsource than non-direct materials (supplies, office goods and equipment, services, etc.) since they are directly tied to the manufacturing process and generally require considerable process and domain expertise.

Some observers, however, believe some companies will soon try outsourcing for direct materials as well.

As with most outsourcing initiatives, the key is setting a current baseline, making sure you can measure the results going forward, and agreeing on an implementation plan, IBM’s Duray told Supply Chain Digest.  In general, he said, companies outsourcing procurement functions will incur some upfront cost for the set-up and transition, usually commit to a minimum fixed level of spend with the outsourcer for the contract period, and then have some level of variable cost based on the number of transactions or other metrics.

The relationship needs to be governed by clear Service Level Agreements (SLAs) and cost targets identified at the beginning of the relationship.

Colgate itself emphasized it was still leveraging its internal expertise despite the outsourcing relationship. “Relying on innovative and unique purchasing tools developed for its global SAP systems, Colgate will oversee all global purchasing carried out both by internal Colgate procurement teams and IBM specialists,"the company press release said. “This arrangement will provide Colgate an extraordinary capability to deliver industry-leading purchasing expertise to all its global locations.”

Do you believe that use procurement outsourcing will continue to expand? Why or why not? Can it be applied to direct materials too? Let us know your thoughts.