Optimization of production purchases for a major international company

Task

To reorganize the procurement system – centralize procurement, separate operational functions from the strategic ones, implement transparent business processes and procedures. To achieve savings of 10% or 80 mln EURO per year, to reduce FTE by 15% (14 FTE), to reduce inventory by 10%, to increase the payment grace period from 20 to 30 calendar days upon the project implementation. The Vice President for Procurement and Logistics decided to bring the independent consultants on-board, as there were resources available in the company to complete the tasks.

Client

A large international FMCG company

Type of service

Consulting in Procurement

Period

February 2011 – March 2012

Case

During the period of 5 years the company bought several plants in Russia and combined them under one brand. The procurement expenses for all the facilities amounted to 800 mln USD per year. Just 60% of all raw materials were purchased centrally. The contract conclusion and settlements were performed at the plants, therefore the prices and commercial conditions varied. The management considered financial and labor costs were excessive. When trying to analyze the costs, it appeared that the ERP system did not ensure reliable analytics and statistics on procurement. The managers at the central office were not aware of the actual structure of procurement departments on sites and their responsibilities. At many facilities, the procurement specialists were distracted by non-core tasks – planning and organizing transport, customs services, arranging payments, managing inventory, selling waste.

During the period of 5 years the company bought several plants in Russia
Procurement expenses amounted to 800 mln USD per year
Contracts were concluded and settlements made at the plants
The management considered financial and labor costs to be excessive

The Process

1. Data collection and analysis

We analyzed the processes at 8 plants, conducted 55 interviews with the employees and found out that 25% of procurement specialists actually did not work at the procurement department, but at other departments. We found out that there was no coordination and uniformity between the plants. Each plant had its own tender procedure, inventory policy, procurement, and supply process in place. ERP system analysis demonstrated that the module of contracts, requests and orders was not used. The orders were introduced into the system after the materials had been supplied only to settle the invoice from the supplier.

We analyzed the processes at 8 plants and conducted 55 interviews
We found out that each plant had its own tender procedure, inventory policy, procurement, and supply process in place
2. Works performed

Based on the analytics results, we described the current process model and organizational structure and developed the new organizational structure and model.

 

We coordinated with the management and did the following:

 

  • We implemented the new unified org. structure. The changes caused resistance in the production and logistics departments, as they were given additional tasks and were deprived of the procurement functions.

 

  • We hired additional staff to fill in the new organizational structure. New category manager positions were introduced in procurement, and they were filled with the newly hired people or the company employees. We recommended dismissing 25% of employees.

 

  • We trained category managers. Handed the strategic work on tenders and contracts over to the managers. We created job descriptions for category managers, supply chain and planning specialists.

 

  • We standardized prices and specifications at the plants. We set the rule that the prices could only be set and adjusted by the category manager of the central office. We introduced automatic control of price conditions through the ERP system by the central office.

 

  • We separated non-core functions from procurement – planning, logistical support, planning and arrangement of payments, inventory management.

 

  • We distributed the functions between departments. We centralized supply planning and settlements with suppliers at the plant level. We developed and implemented uniform procedures for the planning of needs, tender and contract activities, logistical support, transportation, acceptance, and payment process.

 

  • We implemented ERP module for procurement. We trained the key users to work in the system, prepared instructions and templates. The ERP system was outdated, but the company planned to implement SAP ERP only in 2-3 years.

 

  • We created category teams, which included category managers, planning and production departments. The teams developed strategies by categories and started implementing them in the plants under our guidance.

 

We presented the results of the project to the management of the company and the plants, got approval, and agreed to extend the project to indirect procurement categories.

3. Automation

Due to the limited budget and insufficient application of IT systems, we decided to improve the existing tool. As a next step, we planned to introduce a more advanced cloud-based automation system.

Results

The project brought not only the direct benefits in the form of cost reduction, but also allowed to restructure the procurement system completely.

 

Other achievements from the project:

  • Introduction of the new organizational structure and redistribution of responsibility between the employees
  • Creation of a centralized procurement team from scratch
  • Implementation of new processes – P2P, strategic sourcing, category management
  • Increased coverage of the raw materials categories by procurement department (up to 98%)
  • Obtaining additional discounts due to a stronger team, consolidation of volumes, use of strategic approach to work with suppliers
  • Procurement process automation without investing in expensive software with the use of existing tools
  • Reduction of procurement department staff by 25%
  • Reduction of raw materials and packaging inventory by 33%
  • Increased payment grace period from 30 to 60 calendar days
  • Improved quality of planning, since all the stages were transferred to the logistics department – distribution production and MRP planning

Savings amounted to 15% or 120 mln USD per year in raw materials and packaging expenses

Customer Feedback

Vice President, Procurement and Logistics

“It was the most strategic and complex project in the history of our company. There was a lot of resistance from different departments, as we had all the functions involved in procurement. We had no idea that the project would affect so many areas and that there would be so many traps and pitfalls. We implemented the project thanks to the solid support of the management and owners of the company, as well as the expertise of PrECA specialists. The next step is the automation of strategic sourcing processes and putting things in order in indirect purchases.”

Tools

Procurement Methodology and Best Practices

  • Best practices applied at multinational companies
  • Procurement automation methodology
  • Procurement audit and consulting methodology
  • Survey templates for the customer’s employees

Knowledge and experience in reengineering and procurement automation

  • Experience in implementing 8 major procurement reengineering projects
  • Knowledge of procurement specifics: business processes, principles, roles, bottlenecks

Skills

  • Task and project management
  • Communication with the stakeholders
  • Strategic thinking
  • Standardization, unification, and optimization
  • Data acquisition, structuring, and analysis

IT tools

  • Macros and tables for processing and analyzing large data arrays
  • Experience in implementing procurement systems: SRM, eSourcing, P2P
  • Experience in implementing ERP-systems: SAP, 1C

The project team

Zelimkhan Suleymanov

Project Manager

Anatoliy Tsypkaikin

Business Process Consultant

Participants about the project

Zelimkhan Suleymanov

Project Manager

“The FMCG sector is very competitive, therefore the managers pay great attention to procurement. The cost of raw materials forms a considerable share of the total cost of the final product, so cost optimization greatly affects the company’s profit. However, to achieve results, you need a strong procurement department, not burdened with operational stuff, urgent and low-cost projects. We need the employees who can think strategically, analyze data and lead projects to implement changes.”

Get a consulting session for free

Submit a request if your company faces similar issues. We will conduct express diagnostics of your procurement process and, will explain what can be improved at a consultation.

By clicking on the button you give your consent to the processing of personal data

Thank you! We will call you back soon.
Oops! Something went wrong while submitting the form.

Other projects of the category

view all projects

Consulting in Procurement

Optimization of GNFR purchases for a major grocery retailer