Food manufacturer saves £2.2 million by focusing on indirect procurement
Driving EBITDA improvement from enhanced indirect spend management
A leading UK based chilled food manufacturer, supplying leading supermarkets, retailers and foodservice customers with high quality Food-To-Go, has recorded savings of £2.2 million by delivering a targeted programme of procurement cost reduction.
The business had enjoyed a period of rapid expansion and was keen to ensure its margins were being protected through the effective and ongoing management of costs. With a mature buying team already focusing on core ingredients, additional improvements were sought in the ‘indirect spend’ areas.
The indirect spend opportunity
Indirect spend refers to an organisation’s expenditure on goods and services which are not directly incorporated into the product (or service) ultimately sold to customers. It includes all of the supporting or overhead expenditure, whether corporate or factory related.
For many organisations, most spend falls into ‘direct’ or core materials. However indirect spend often forms a surprisingly significant value, but with expenditure spread over a wide scope of categories and suppliers and often managed by non-commercial functions. As a result, it is often overlooked and underleveraged with significant opportunities for savings.
Developing a bespoke approach
The business required specialist external support to quantify the opportunity for savings and to lead the subsequent programme of cost reduction. With a deep background of experience in the food manufacturing sector, Procura was selected as a partner to deliver the programme.
- An initial Spend Analysis and Opportunity Assessment indicated that a significant seven figure saving, delivered within the current financial year, would be possible.
- More than 30 individual sourcing projects across 20 indirect spend categories were developed
- Sourcing strategies would include re-negotiations with current suppliers, full tender processes and delivery changes
- Significant stakeholder engagement would be required
- Supplier service levels and product specifications would need to be maintained and improved
- In addition, an effective Spend Intelligence Solution would be required to keep track of financial savings and inform additional improvements in the future
Significant and sustained results
During a 9-month project, savings of £2.2 million were delivered with major savings achieved across several key indirect categories:
|Food Testing Products & Services||10%|
|PPE and Consumables||14%|
Points to consider
- The Parato Rule summaries the ‘indirect spend challenge’ perfectly; In most instances, 80% of spend will sit with the top 20% of core, ‘direct’ suppliers. The remaining 20% of spend (usually indirect areas) is typically spread across the remaining 80% of the supply base
- Many organisations are now segmenting expenditure and applying their own internal resources accordingly
- Creating an Indirect Spend Managed Service is increasingly being used as an effective way of maximising savings from indirect spend on an ongoing basis