Mid-Market Procurement - The Pitfalls of Current Approaches - Analytics & Spend Automation

Mid-market companies are at a significant disadvantage when compared to larger corporations — a key finding from Simfoni’s analysis of its customers’ procurement and savings delivery capabilities in mid-market companies.

It’s OK to obsess about top-line growth, but what lies beneath is a supply chain that eats into profit since it is not controlled and optimized. Mid-market companies are missing out on at least 5-10 percentage EBITDA points achieved through [procurement](/content/procurement/ "Procurement"/index.html) effectiveness that their larger corporate peers routinely extract.

And how well a business manages and optimizes spend has a major bearing on working capital — the cash required to fund business operations. Hackett Group’s 2016 study of working capital concludes that every seven-day reduction in the cash conversion cycle adds up to 1% in sustainable EBITDA margin. For a company with an EBITDA margin of 5%, this is roughly equivalent to a 20% increase in profit.

The Procurement Challenge

Essentially the mid-market procurement challenge can be broken into three areas: resources, technology, leverage.

Resources:

Large organizations have large spend. They have the luxury of being able to hire top talent, with strong category or product expertise because they can amortize this investment across a wider spend scope. For example, most Fortune 500 manufacturing companies have an expenditure on packaging that runs into the hundreds of millions (if not billions), and a dedicated, elite team of packaging experts delving into low-cost country sourcing for plastic bags, challenging cardboard box specifications, and investigating returnable stillage options easily generates a 10-to-1 ROI if the spend in scope is, say, $300 million.

Medium-size companies still have the same product complexity. They still have to put their products in bags, which are then shipped in boxes, etc., but the spend in question might be only a tenth of that of the larger corporation, $30 million in this case.

Technology:

Of course, we all know that a key role of technology is to streamline — even automate — manual tasks. Most technology costs do not align linearly with company size. The major players all have some version of a mid-market offering these days, but those solutions achieve a lower price point in part by stripping out certain functionality, which arguably weakens their value to the customer.

Furthermore, the adoption of technology presupposes that personnel are in place who know what technology to deploy and are adept at implementing it. More often than not, this is not the case, and the additional cost burden of hiring consultants to help with implementation and training further weakens the business case for such adoption.

Leverage:

Simply put, with a tenth of the spend, you have a tenth of the bargaining power with suppliers. On a like-for-like risk basis, mid-market companies typically have to pay more for the same items. Mid-market companies are not scrutinized to the same level of ethical and social responsibility as the large corporates, hence they can afford to take greater risks in [sourcing](/content/sourcing/ "Sourcing"/index.html) their requirements from less established vendors.

Bringing it all together, it’s a bleak picture for mid-market companies’ procurement — lack of resources, lack of technology support, and lack of volume leverage.

Solutions

Solutions relating to volume leverage have existed for some time. The GPO (group purchasing organization) model was originally borne out of the concept of smaller organizations grouping their spend to get better vendor pricing.

In more recent times, the e-marketplace has arisen to offer improved transparency while still aiming to create volume (and hence price) leverage. Most famously Amazon Business. Industry-specific verticals such as Purchasing Platform offer not only better pricing but more specific products tailored to the needs of the sector.

Another option is to look at outsourcing procurement entirely. The main procurement outsourcing players such as Accenture, IBM, and GEP are really only interested in deals with billions of dollars of spend.

To date, most mid-size organizations have relied on hiring consultants or contractors to tackle strategic spends from time to time.

In summary, mid-market companies struggle to break the status quo and are stuck with sub-optimal procurement deals and inefficient manual processes, even though they can perhaps sense the opportunity to reduce spend.

Conclusion:

Unlike sales and marketing efforts, procurement is entirely within your span of control. On-Demand procurement provided by Simfoni has zero upfront capital investment and generates immediate net savings realization; two benefits that mid-market companies can surely appreciate to finally get behind procurement as a source of sustainable shareholder value creation.