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Procurement as a Profit Center

How do you change your procurement department from a cost center to a profit center?

All businesses, including laboratories are looking for more options to increase their profits. Procurement functions, today, play an increasingly important role in improving business performance and productivity. To enhance business performance, laboratories are exploring new procurement models, which include widening the supplier base, making it more responsive and more flexible. Companies are partnering with procurement outsourcing providers in areas such as procurement analytics and procure-to-pay cycles.

Utilizing LPS procurement services, clients are able to achieve rapid, sustainable improvement in their procurement performance, drive innovation, alleviate risks with regard to supply and steer growth. LPS's procurement services deliver several benefits including sustainable long-term savings in procurement that directly impact the bottom line. LPS focuses on managing the clients' purchases by delivering process efficiencies through organizational efficiency and effectiveness, and creating measurable savings quickly. The LPS procurement outsourcing solution helps laboratories restructure and revitalize their procurement function.

The High Cost of Procurement

Purchasing lab supplies is a major expense line on a laboratory balance sheet. Why? Here’s what wiki.answers.com has to say.

Would you believe that the actual cost to issue a purchase order is approximately $75?

After you include the following steps a purchasing agent must:

  • Find the appropriate material
  • Contact the vendor
  • Order the material
  • Reconcile the invoice
  • Pay the invoice

The warehouse [receiving department] must:

  • Receive the material
  • Acknowledge receip
  • Transfer information to accounting / purchasing for reconciliation

If it is an unfamiliar item or if there are significant sourcing efforts involved the cost will rise. If there are electronic ordering and payment steps, the costs may decrease.

Convert a Procurement Operation into A Strategic Competency

More effective management of procurement can drive a significant impact to a lab’s P&L, including on average a four percent reduction in spend, equating on average to a 1-2 percent overall reduction in a company's expenses. Additionally, effective alignment of a lab's supply and services chain can be a catalyst to higher levels of productivity, faster speed-to-market, greater flexibility and improved quality and innovation. However, most labs struggle to properly align procurement, focusing internal resources on tactical and non-differentiating activities, and limiting resources committed to strategic planning, alignment and improving the overall effectiveness of the supply and services chain.

Based on results achieved in the marketplace, it is clear that utilizing a procurement services provider can yield impressive results. Service providers can bring deep market insights into common spend categories, commit talent to critical analytics, and execute efficiently on operational procurement activities. Industry research (from Aberdeen Group) reports dramatic improvements such as these in procurement efficiency and effectiveness:

  • 28 percent increase in average savings from sourcing (typically equating to a 1-2 percent increase in savings as a percentage of spend)
  • 18 percent increase in spend under management
  • 31 percent improvement in contract compliance
  • 32 percent increase in suppliers enabled

A procurement services company can also reduce lab operational costs by 15-20 percent through process improvement, standardization, and realization of economies of scale. Accordingly, procurement service providers should be treated as a tool to improve capabilities and effectiveness by accomplishing more for each dollar invested in procurement capability.

Utilizing a procurement service provider is not an 'all-or-nothing' proposition. Most organizations aim to create the optimal mix of internal and external resources for maximum spend coverage, compliance and performance. LPS recommends when considering a procurement service provider, this should be approached within the context of an overall procurement strategy. Those companies who engage a procurement service provider simply to reduce their cost of procurement often miss the larger opportunity to transform their procurement operation into a strategic competency.

A plan of action for companies interested in a procurement service provider should include these steps:

  1. Understand the range of service provider capabilities currently available in the market and the experiences that other companies have had with procurement outsourcing
  2. Define strategic objectives for procurement and the role that both an outside contractor with key expertise and procurement technology can play in attaining these objectives
  3. Educate your company leadership on strategic options and the benefits and risks associated with utilizing a procurement service provider and develop a high-level business case.
  4. Ensure that the sourcing project incorporates a contractual statement of work and service level structure that will provide clear accountabilities and meet your strategic objective.
  5. Develop an implementation plan, change management strategy and governance program to ensure the success of the project.
The Business Case for Utilizing a Business Process Services Provider

The benefits from outsourcing a procurement service provider are generally as follows: 75 percent emanate from sourcing.20 percent come from enforcement of compliance, and approximately 5% come from reduced procurement process costs.Given these ratios, many clients spend an inordinate amount of time focused on the categories of benefits with the lowest return.While improving the “plumbing” – straight through processing, invoice reconciliation, exception management, and payment is important, the big price comes from focusing on sourcing.

Analytics as a Component of Procurement Services is Key

It is difficult to change a labs consumption – which drives spend reduction – and execute savings strategies without the facts.Most laboratories have little or no capability of analyzing their spending patterns and depend mostly on suppliers for this data.Suppliers are increasingly reluctant to provide this information so self-generated analytics are one of the most valuable things your service provider provides to your organization.

Summary

A business process outsourcing service provider is an excellent way for labs to lower their costs and increase their profitability. To enhance business performance, labs are exploring new procurement models. Companies are partnering with procurement outsourcing providers in areas such as procurement analytics and procure-to-pay cycles and double digit cost reduction opportunities are being realized.

LPS focuses on managing the clients' purchases by delivering process efficiencies through organizational efficiency and effectiveness, and creating measurable savings quickly. The LPS procurement outsourcing solution helps laboratories restructure and revitalize their procurement function.

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