Expert Insight

By Thomas Bornemann
ICG Commerce Consumer Products Leader

IGC Commerce

Date: November 4, 2010

Supply Chain Comment: Unlocking Millions for Reinvestment

Hidden In Your Supply Chain Is An Opportunity To Drive As Much As A Margin Point, Or More, Of Savings

The last twenty four months have been anything but easy for supply chain executives.  Lower demand levels, volatile credit markets, increasing global competition and rising commodity costs have put extreme pressure on profits and growth has been significantly harder to achieve.   In the midst of this volatile landscape, supply chain leaders have had to focus on mitigating risk across the end-to-end supply chain and integrating functions for a truly agile supply chain organization.  At the same time, the supply chain organization faces continued pressure to deliver cost savings that can fund new product innovation and new market penetration to drive margin and top-line growth.  For many, the dilemma is where to look for new and additional savings. 


What Is this Area of “Hidden Cost”?

Non-core spend. Also called “indirect” or “non-strategic”.  Based on our research, non-core spend at minimum represents fifteen percent of revenue and can exceed twenty-five percent for service companies.  Positively impacting just one percent of this spend can unlock millions of dollars that can be reinvested into the business.   An ICG Commerce analysis of non-core spend across leading companies showed that those that excel at managing non-core spend are achieving savings levels five times greater than the average – or the equivalent of $136MM on $1B in non-core spend.

Why Is It So Difficult To Address?  

Finding and addressing non-core spend comprehensively across a large, complex organization is challenging.  The function is highly fragmented, residing across the enterprise and covers a variety of unique buying categories.  In addition, line of business owners often resist efforts to apply a standardized sourcing and spend optimization process to their areas -- either based on past practice or because their internal organizations don’t have the specialized functional expertise required to satisfactorily support them.


What Is Required? 

Maximizing returns from non-core spend management revolves around the following key levers.  Most companies are under-performing on two or more of these levers, and therefore achieving only a fraction of their potential for cost reduction.


  • Spend Managed - Most companies have not amassed the full magnitude of non-core spend under central management – and many are addressing only 50% or less with the required combination of category expertise, supply market intelligence and sourcing rigor.


  • Sourcing Results - On average, most companies are only achieving 60% of the potential savings from their strategic sourcing efforts, because their negotiating power is constrained.


  • Savings Realized - Most companies are only realizing 60% of the savings identified in the sourcing process, while 40% of these identified savings never hit the bottom-line.

  • Continuous Improvements - Because most categories are sourced and forgotten, companies often forgo 2-3% of additional savings (on total spend managed) that comes from a rigorous and ongoing continuous improvement process.

Final Thoughts

In today’s volatile economy, supply chain leaders can no longer afford to ignore the opportunity to optimize their non-core spend. To free millions for reinvestment, they must accelerate their ability to capture these savings, however, building the internal capabilities needed to optimize non-core spending would take companies years and a large fixed investment, both needed PRIOR to any results being delivered to the bottom line.  Leading supply chains are outsourcing spend optimization to rapidly access expertise and drive savings to the bottom line -- delivering greater agility in an extremely short timeframe, all while generating large margin impact.

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About the Author

Thomas Bornemann, a 25-year industry veteran, leads ICG Commerce’s Consumer Products practice.

Previously, Mr. Bornemann was the managing partner of Consumer Products for Clarkston Consulting, where he worked with a variety of leading Fortune 100 CP companies.

Mr. Bornemann has recently been appointed to the Pamplin Business School board at Virginia Polytechnic Institute and State University and also currently serves on the board of Consumer Goods Technology.

Bornemann Says:

In today's volatile economy, supply chain leaders can no longer afford to ignore the opportunity to optimize their non-core spend.

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