TPI Helps Wyeth Make Sense of Spot Buying Via Customized Procurement Outsourcing Process

TPI teamed up with Wyeth Pharmaceuticals for a multifunction IT and BPO project that specifically addressed procurement outsourcing. While Wyeth’s strategic sourcing organization was highly centralized and competent, its decentralized transaction processing and spot-buying functions — conducted by requisition staff comparatively untrained in procurement — were less efficient and presented opportunities for savings.

With guidance from TPI, Wyeth pursued a solution that isolated spot buying from traditional procurement transactions, designating a new, cost-justified process to fill the niche between proactive strategic sourcing and transaction processing. By more closely managing spot buying and using it only when purchase amounts were large enough to justify the time spent and the cost savings, the new sourcing solution yielded better margins from the spot buying process and helped maximize overall value for Wyeth.

THE CLIENT’S CHALLENGE
The way Wyeth traditionally broke out procurement sourcing was unlike the typical corporate procurement structure, which usually treats spot buying and transaction processing similarly. The client’s structure required a procurement sourcing solution that could uniquely address each of three separate procurement areas:
• Strategic sourcing for the largest purchases
• Spot buying for immediate, ad hoc, one-off purchases
• Transaction processing, which handled routine or previously sourced items that did not require formal quotes

While Wyeth’s strategic sourcing organization was highly centralized and extremely competent, it was necessarily limited in size. Because it had to apply its own efforts for maximum leverage, the group typically dealt with purchases higher than US$50,000 and would normally spend weeks exploring competitive sourcing options.

In contrast, the decentralized transaction-processing and spot-buying functions tended to fall to operations or marketing staff who were untrained as buyers and often conducted spot buying inconsistently, without getting multiple bids or analyzing purchasing options to determine potential savings. As a result, field personnel tended to indiscriminately merge Wyeth’s two distinct processes, often analyzing and managing spot buying in the same way as transaction processing, which led to value leakage.

Prior to the procurement sourcing project with TPI, Wyeth did not place any centralized management focus on spot buying. Although executives considered the potential savings from improved processes significant, they continued to delegate this effort to the field because their limited number of procurement professionals were more effectively assigned to the strategic sourcing function.
Because the leakage from spot buying needed to be addressed, Wyeth required a custom procurement solution that would appropriately separate spot buying from the other two procurement areas and apply it as a distinct practice that could return savings to the bottom line. The service providers’ standard offerings, however, did not match this requirement, and the client called on TPI to craft a solution.

The procurement advisory specialists at TPI worked with Wyeth’s personnel to develop the business case for an enhanced spot buying process, identify which service providers offered it as a distinct service, and gain commitment from senior management to move forward with an outsourced solution. The solution focused on spot buying as a separate scope of work that possessed a unique set of requirements, a method of measuring performance, and a pricing mechanism.
The solution Wyeth and TPI specified for the unique procurement environment isolated spot buying from traditional procurement transactions and designated the new process to fill a specific niche between proactive strategic sourcing and transaction processing. Spot buying would deal only with purchase amounts sufficiently large enough to make the time and cost spent on competitive bidding worthwhile; but not so large as to apply the process where strategic sourcing would be the more effective technique. The spot buying range was initially set at between (US) $10,000 and (US) $50,000, although larger expenditures were also in scope if they were not covered by a strategic sourcing initiative.

The practice of clients and service providers focusing on-spot buying as a distinct focus rather than handling it as part of the transaction pricing effort represented a departure from the normal process at the time. Management responsible for the success of Wyeth’s outsourcing project generated a compelling business case to ensure implementation and took a bold stand that supported a new emphasis on spot buying. Management and the service providers committed to an average spot-buying savings of 8%. When applied across the addressable spend, this amount represented a number so large that it accounted for 40% of the entire project’s business case benefit, even though the procurement function was a mere 5% of total overall project cost. This magnitude of savings from the procurement element of a larger client project that included additional functions clearly justified this venture.

Before the new spot buying process was instituted, a requisition or administrative support person would likely have found a supplier without taking the time to research competitive quotes and could therefore potentially sacrifice 5% to 30% savings. TPI and Wyeth focused attention on how the service provider could use the routine as a powerful technique for determining market-based pricing for immediate needs and then select the optimal purchasing option(s) to meet those needs. Once an immediate need was indentified (usually via receipt of a user requisition for material or services) and the projected cost of the goods exceeded the likely benefit from the service provider going to market for immediate bids, the spot buying process was triggered and would typically include these steps:
1. Service provider specialists familiar with the marketplace for those categories and geographies would identify a set of potential suppliers from several sources, such as its own internal database, previous Wyeth spend for similar items or through Web-based research.
2. The specialists would access the most current pricing from potential suppliers, often requesting a quote to be returned within 4 to 24 hours.
3. The specialists would select the most competitive bid(s), and in some cases, would initiate the purchase.
4. Often the selected bidder(s) would be contacted for clarifications and negotiations concerning delivery, quality, pricing or some other element of value to meet the requisitioner’s need.

CLIENT BENEFITS
Working in close collaboration with TPI advisors, Wyeth established a well defined approach for spot buying that included a targeted method of measuring performance and predictable service provider fees. This distinct approach to a commonly used process was substantially different from the client’s strategic sourcing and transaction processing.
The most tangible benefit for Wyeth was projected spot-buying savings of 8% applied across the addressable spend of items greater than (US) $10,000. Significantly, 40% of the projected business case savings came from the procurement function, which represented less than 5% of the total contract value.

FOR MORE INFORMATION
TPI’s CPO Services experts can help your company achieve its goals through objective advice, knowledge of your industry, and experience with arrangements from simple to complex. Looking for a strategic partner? For more information, contact Hack Heyward, Director, TPI, at +1 281 660 1842 or hack.heyward@tpi.net