In business, spending is a necessary evil and often a reason why many firms get into trouble. In today’s economic climate, the quandary of how to spend and save has become even more of an issue for firms to wrestle with. Can procurement outsourcing be the solution?
For medical device manufacturer Vasca Inc., based in Tewksbury, Mass., procurement issues were becoming a problem: “We are a smaller firm, with limited resources. None of us are procurement experts,” admits Paul Marad, director of engineering at Vasca.
Vasca produces an implant used for vascular access, designed to ease the dialysis process and improve the quality of life of dialysis patients. Vasca’s ‘LifeSite System’ customers include nephrologists, interventional radiologists and vascular surgeons throughout the United States.
Marad explains that the five-year-old company could handle its logistics needs in-house. But the executives realized they could reduce total procurement costs and lead time using procurement experts outside the firm. “We needed people who could find suppliers and source materials more efficiently than we could,” he says. But for Vasca, it was the outsourcing solution that found them when ThreeCore, an engineering-based procurement firm headquartered in Danvers, Mass., approached Vasca as part of a targeted marketing campaign focusing on medical device manufacturers.
Even Custom Materials Can Be Outsourced
ThreeCore’s founders, Tom Petersen and Tom Collins, had led high-tech manufacturing operations for decades. They saw the inefficiency surrounding procurement of custom direct materials, such as wide price variations and dependence on single source suppliers.
Petersen explains these problems are largely due to the lack of time and experience of most purchasing teams at small to mid-sized manufacturers. Petersen and Collins realized there was a significant opportunity for starting an outsourced procurement firm focusing on lowering the cost of custom direct material procurement.
“Only a few firms are addressing the custom direct material segment,” says Petersen, who believes the market for outsourcing procurement in general is in the early stage of development.
Scott Alaniz, eProcurement analyst at the international investment bank Stephens Inc., which is headquartered in Little Rock, Arkansas, estimates the current market size of corporate spend handled by third-parties is about three percent.
ThreeCore has honed its category-specific expertise, focusing on high-tech manufacturing: “These firms, like Vasca, have a high concentration of custom direct materials in their products and typically produce lower volume, higher mix products,” says Petersen. He explains that though this production pattern is the least conducive to automated procurement products, it is perfect for ThreeCore’s variable sourcing method.
Getting The Price Necessary To Compete
ThreeCore has been working with Vasca for the past seven months, finding and qualifying new suppliers. The firm also manages the negotiation and sourcing for the materials Vasca has asked suppliers to procure.
“We start them off by giving them a part to source,” explains Marad. “ThreeCore works with us to understand and clarify the requirements and documentation, then identifies the most qualified suppliers and manages the online sourcing,” he says.
Vasca’s engineering department manages the working relationship with ThreeCore and determines the firm’s level of involvement. As for service level agreements, Marad says the relationship with ThreeCore is still activity-based: “We pay them for specific projects. If they do not perform, we simply cancel the relationship with them,” he says.
But terminating relations with ThreeCore looks unlikely. Marad says the supplier’s procurement process has ‘greatly reduced’ Vasca’s total procurement costs and lead time. “In comparison to the old way, we spend less time on sourcing, and still get the price and quality we need to compete,” he explains, adding that in cases where Vasca is not familiar with a particular material, ThreeCore’s expertise in this area has allowed the firm to find and source those materials faster.
Marad anticipates smaller manufacturers will need the types of outsourcing services ThreeCore provides, especially if the products are high tech. Alaniz believes this type of procurement will be a huge market, comparing its potential to the third-party logistics market estimated at $50 billion: “We think that procurement is the next major area of business process outsourcing,” he says.
Lessons from the Outsourcing Journal:
- Outsourcing procurement services reduces costs and lead time, focusing human and financial capital on core competencies. This is true even when the parts must be customized.
- Identifying qualified parts suppliers can dramatically impact a business’ service level and profits.
- Procurement cycles can be significantly reduced with third party, category-specific expertise. This can be hard to achieve with internal purchasing teams.