Controlling Third Party Spend: Implementing a Purchasing Plan

Background
A large European petrochemical site had requested an independent assessment of how it could improve both its cost structure and its performance. The Operations, Maintenance, Technical Services and Purchasing departments had all been identified as areas where new and improved practices could deliver a 20% fixed cost reduction over a four-year period. Since all third party spend had to go through Purchasing, it was naturally a focal point for cost control and required clear planning.  A three-year Purchasing Plan therefore became a key deliverable of the project.

Approach

In order to achieve savings across the board, a top-down target had already been established.  However, a bottom-up approach was needed in order to identify the specific actions that would facilitate reaching the pre-defined goals.

A thorough third party spend analysis was performed to identify savings opportunities. The entire year's expenses were analyzed line by line and organized into different expenditure categories. A table was then created that formed the basis for the Purchasing Plan.

Results
Many cost lines existed simply due to inertia: they had become recurrent costs that were no longer being questioned internally. As a result, a large group of long-term suppliers had succeeded in securing a constant flow of work within the site.

Additionally, the Purchasing department was being consistently bypassed, preventing it from playing an active role in negotiations. Consequently, the added value of Purchasing – both transaction safety and the ability to negotiate lower prices – could not be fully realized.

Solutions
A systematic approach was applied to evaluate all accelerated expenditure, which was then measured against a checklist to identify savings opportunities.

A workgroup was created for each category, pulling together Purchasing with the other departments responsible for expenditure. Each meeting adhered to the following logical sequence:
•    Kick-off: participants were aligned and the scope of work was defined;
•    Analysis: data and all relevant information was reviewed;
•    Options: different solutions were identified and selected; and
•    Implementation: a roadmap with milestones and responsibilities was delivered.

The workgroups agreed on a number of actions  per category, which  were  then quantified and planned in order to achieve the defined targets.  Listed by category, these actions included:
•    Maintenance: (the largest category representing 55% of third party spend) a Pareto analysis determined the renegotiation of the five biggest service areas, followed by the smaller contracts;
•    Inspection: the proposed actions required both the reduction in the large number of different suppliers and the renegotiation of contracts,  producing a decrease in the actual total service cost of up to 25%;
•    Logistics: three different contracts were merged and renegotiated;
•    Transport and travel expenses: a car pool system was established, reducing the number of company cars on-site by 24%. While the previous travel policy had been to buy flexible, full-fare tickets, the new policy made it mandatory to buy restricted tickets which often cost almost three times less; and
•    Facilities: an old, inefficient and expensive oil heating system was replaced by low maintenance highly efficient modern heaters.

Benefits
Once all quantified actions had been assembled and applied, the Purchasing Plan became a critical management tool for planning and controlling the Purchasing department´s core activities.

Over a four-year period, the actions rep-resented a €10m (5%) CAPEX cost reduction and an €8m (12%) Fixed Cost saving.  

Furthermore, the Purchasing Plan remains an excellent tool that can be used to anticipate, monitor and control third party expenditure. Due to its database structure, the Plan enables detailed follow-up to be conducted and achieved progress to be tracked at a high level.