Strategic Sourcing Overview:

Manufacturing Services

www.gep.com
Strategic Sourcing Overview:
Manufacturing Services

Manufacturing Services can include any type of

Trends in Manufacturing Sourcing
services category that is a critical application in
the daily function of manufacturing. When In recent years, there has been a surge in the
prioritizing sourcing projects, services have sourcing of non-core MRO and manufacturing
traditionally been secondary due to their services categories, as these spend-areas have
complex nature, and have often been untouched often been untouched, or only loosely managed.
by procurement. Although the process of A major force in driving this change is not only
sourcing these categories may not be as intuitive corporate mandates to bring unmanaged spend
as tangible commodities, their more complex under control, but also a corporate alignment of
nature often translates into high savings sustainability goals and objectives. Technology,
percentages and, therefore, huge wins, when increasingly used for quality control, is a key
properly addressed. contributor to outlining quality requirements,
gathering and sanitizing specifications and
Objectives of Sourcing Manufacturing Services approving suppliers. Typically, manufacturing
are often similar to those of other categories: services projects are charged on a “per-project”
basis, with little visibility into cost composition.
Ÿ Examine vendor relationships across all
Procurement's role is to use sourcing expertise to
business units and geographies; leverage
unbundle costs into cost drivers, such as labor,
spend and use strategic sourcing techniques
time, material, and equipment rentals. The
to negotiate competitive pricing from
coordination between technology and
qualified vendors
procurement has led to a massive consolidation
Ÿ Achieve cost reduction targets while
of vendors geographically and a standardization
maintaining or improving quality and service
of services and supplies across locations.
Ÿ Improve spend forecast accuracy, cost awareness
Ÿ Develop and implement multi-year contracts Types of Manufacturing
with standardized terms and conditions
across the corporation
Services Categories
Ÿ Reduce redundancy of activities within each
Ÿ Motor Repair
business unit -- supplier qualification, bidding
Ÿ Janitorial (and other facilities services)
and performance management
Ÿ Engineering and Construction Services
Ÿ Streamline and improve existing processes
while sharing best practices and knowledge Ÿ Maintenance and New Construction

across divisions and geographies (Roofing, Insulation, Painting)

Ÿ Equipment Leasing
Strategic Sourcing Overview:
Manufacturing Services

Each organization may classify manufacturing services sourcing strategy can be used to address categories
in a different way, and the specific categories within it that may seem to span the gamut of services. This is
depend on the industry. The important thing to note is because the underlying cost drivers, restrictions, and
that common characteristics allow similar sourcing desired outcomes are often structured similarly.
strategies to be followed, resulting in realized savings. Considerably different categories can be addressed
The beauty of these categories is that a similar with the same sourcing strategy.

Characteristics of Services categories

Complexity of Spend: Manufacturing services Emotional: Due to the local nature of the categories and
categories are often decentralized, with relatively low relationships formed, manufacturing services categories
spend on a site specific basis, but sizable spend across tend to be fairly emotional.
the enterprise. This spend is often unmanaged, or
loosely managed at the local level. Information Management: There is rarely a common
taxonomy across sites, and internal data is often
Regional: Vendors tend to be local or regional, with extremely high level. In technical services categories, each
few to no formal contracts in place. site may have unique specific systems or products that
are part of larger capital projects. Quality data is hard to
manage and must often be obtained from vendors.

Components of Cost
Manufacturing services categories are often billed on a Equipment: Tools and equipment used/bought/rented
per-project basis, without visibility into the cost drivers. by the service provider
It is critical to understand the cost drivers that
contribute to the overall project cost and to negotiate Transportation: Any cost associated with the transport
on as many aspects of the total cost as possible. of material, equipment, labor to site

Labor Costs: Hourly wage rate and the number of Supplier Margins: Overhead, benefits, insurance, profit
work hours
Opportunity Costs: Cost to client for supplier response
Material Costs: Cost of raw materials and any time, and the time it takes to fix the problem
consumables, including a mark-up percentage

2
Strategic Sourcing Strategic
White Paper Overview:Sourcing Overview:
Manufacturing Services
Manufacturing Services

Best Practices
In technical services categories, project success is to many smaller one-off projects. When gathering data
augmented by the involvement of technology or a and focusing sourcing efforts, a best practice is to
domain expert with deep category expertise. When focus your efforts on the portion of the spend that will
reviewing the qualitative aspects of the potential make the biggest impact, typically 80 per cent of the
vendors, the technology experts play a critical role in spend. This 80 per cent rule should also be considered
determining the qualitative characteristics required of a when awarding business and setting stakeholder
“qualified” vendor. These qualities may be expectations regarding outcomes. In services especially,
government-regulated, industry-regulated, or it's important to set everyone's expectations that there
determined on a company or business unit basis. will always be exceptions to the award, whether it be
Where few viable alternative suppliers exist, it may fall for emergency reasons or advanced technical
on the technology expert to work with a new vendor requirements. The important message to share is that
to come up with a technological equivalent. The the sourcing initiative will address the majority of the
qualification process can be lengthy, depending on the day to day business, but there will be a contingency
complexity of the category, and should be built into plan in place for any exceptions that will come up.
the timeline. Additionally, for practicality of data collection, it's
helpful to set a spend threshold (for example: jobs
Unlike commodity categories, the scope of services over $10,000)
being sourced may not always be standard. It could be
location- specific, business unit-specific, or time- In services categories, where project scope or spend
specific. In order to address this challenge, the key is to may not be well defined year on year, it is often
identify and work with common factors between helpful to focus on TCO (Total Cost of Ownership)
vendors and projects, such as labor rates, job savings. These can include volume rebates or any type
descriptions, or equipment rates. This could necessitate of value added service that a vendor brings to the
innovative structuring of pricing sheets, questionnaires, table. Some vendors can guarantee a level of year on
etc. As mentioned earlier, any outliers or specific year savings through methods like SKU rationalization,
requirements can be treated as exceptions. training, warranties and sharing best practices.
Without a volume guarantee, these TCO savings can
Repairs and certain other service categories tend to be reflect hard dollar savings to the client that is reflective
sourced regionally or locally, and sometimes no of the volume of business with each vendor.
national players exist. In order to address this, put
preferred pricing in place with regional or national
vendors, as justified by the facilities requirements. Managing Your Category in the Future
Once you have chosen your preferred vendor(s), you
Unbundling the costs of a job is only part of the can ensure that you are able to realize savings by
equation; it's important to understand the effective establishing a rate card based on mutually agreed
efficiency of each of the suppliers, and there are a few upon parameters. If a group of preferred vendors has
ways that this can be done. Putting together a market been selected, jobs or projects can be bid out to this
basket of sample jobs or projects allows the vendors to group of vendors to ensure continuous competition.
bid on actual work and to provide estimates of their Processes for TCO reporting should be implemented
timing to complete such tasks. If possible, provide with local and corporate sign-offs on savings
historic references, where baseline spend and timing opportunities. Suppliers should be prepared to provide
data exists, so total job cost can be compared across detailed monthly billing reports with all cost drivers
vendors and also compared to historic costs. broken out. Monthly reporting is a critical habit that
will allow easy auditing, as well as provide a central
Spend per job is often very varied in manufacturing
repository for relevant data for the next time that the
services categories, from a few large or capital projects
project comes up for negotiation.
3
GEP helps global enterprises operate more efficiently and effectively, gain competitive advantage, boost profitability, and maximize business
and shareholder value.

Fresh thinking, innovative products, unrivaled domain and subject expertise, and smart, passionate people – this is how GEP creates and
delivers unified business solutions of unprecedented scale, power and effectiveness.

With 14 offices and operations centers in Europe, Asia and the Americas, Clark, New Jersey-based GEP helps enterprises worldwide realize their
strategic, operational and financial objectives.

Recently named Best Supplier at the EPIC Procurement Excellence Awards, GEP is frequently honored as an innovator and leading provider of
source-to-pay procurement software by top industry and technology analysts, such as Forrester, Gartner, Spend Matters, Paystream and Ardent
Partners. GEP also earns top honors in consulting and managed services from the industry’s leading research firms, professional associations
and journals, including Everest Group on its PEAK Matrices of Procurement Services Providers and Supply Chain Services Providers; NelsonHall
on its NEAT Matrix of Global Procurement BPO Service Providers; HfS in its Blueprint Report on Procurement-as-a-Service; and ALM Intelligence
in its Vanguard Reports on both Procurement Consulting and Supply Chain Consulting.

To learn more about our comprehensive range of strategic and managed services, please visit www.gep.com. For more about SMART by GEP,
our cloud-native, unified source-to-pay platform, please visit www.smartbygep.com.

Access our free knowledge resources at https://www.gep.com/knowledge-bank

100 Walnut Avenue, Clark, NJ 07066 | P 732.382.6565 | [email protected] | www.gep.com

Clark, NJ | Princeton | Toronto | Dublin | London | Prague | Mumbai | Hyderabad | Shanghai | Mexico City | Costa Rica | São Paulo | Singapore | Sydney

Copyright © 2017 GEP. All rights reserved.