Four Steps Private Equity Groups Should Follow for Strategic Sourcing Success

NEW YORK, Oct. 11, 2011 /PRNewswire/ -- One way private equity group executives are increasing their portfolios' value is by implementing operational initiatives. According to Crowe Horwath LLP, one of the largest public accounting and consulting firms in the U.S., one such initiative is strategic sourcing, or evaluating what each portfolio company (portco) buys and looking for opportunities to secure more favorable pricing for those common items.

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"Strategic sourcing is an important tool for private equity executives to help improve their portcos' bottom line," said Doug Schrock, one of Crowe's Private Equity performance leaders. "However, approaching strategic sourcing in the wrong way can mean more problems in production, service or quality than the initiatives deliver in financial payback. A fancy report and picking low-cost providers doesn't deliver strategic sourcing success. It takes in-the-trenches work using the right approach."

Schrock suggests that private equity groups consider these four factors to help improve the success of their strategic sourcing initiatives:

1. Know what is actually being spent. To accurately understand what organizations are spending, they should combine all spending data from all sources and then create more specific categorizations that allow for better analysis. Once the quantitative data set is cleaned and complete, it should be combined with other information such as contracts and vendor scorecards to identify where there are significant spending levels, loose controls or fragmented purchasing that offer sourcing opportunities.
   
2. Develop the right sourcing roadmap. Internal procurement teams often feel they are getting the best price possible for their company's purchases. However, Schrock notes that a typical five-person procurement team can't be experts in a hundred different spending categories. Using external specialists with a broader view of the market often uncovers opportunities that hadn't been identified previously. Then, properly sequencing these opportunities can help secure immediate cost savings while setting the stage for longer-term, strategic changes.  
   
3. Recognize it's about more than just cost. Increasing EBITDA (earnings before interest, taxes, depreciation and amortization) in the form of tangible procurement cost savings is almost always the initial driver for sourcing efforts. However, switching suppliers could lead to production disruption, customer service issues or compromising quality or safety. "All of the possible outcomes of supplier switching need to be considered before making a change. The best strategic sourcing projects are never just about saving money, but about the long-term value that a new supplier relationship brings to the portco," said Schrock.  
   
4. Sustain the savings through the right framework. In order to maintain the savings that strategic sourcing brings over the long term, Schrock recommends ongoing review and selected implementation of improvement strategies. For example, the procurement team may focus on supplier management by measuring each supplier's key performance indicators and viability.

Schrock added that strategic sourcing initiatives apply to a broad range of industries and companies. "We're currently helping a $90-billion company analyze its global IT spend, and helping a $70-million manufacturing company reduce its supply spending by $1 million. When we dig in, we can find opportunity in just about any company," he said.

For more information and to register for a free webinar on this topic on Thursday, Oct. 27, please visit: http://www.crowehorwath.com/sourcing.  

About Crowe Horwath

Crowe Horwath LLP (www.crowehorwath.com) is one of the largest public accounting and consulting firms in the United States. Under its core purpose of "Building Value with Values®," Crowe assists public and private company clients in reaching their goals through audit, tax, advisory, risk and performance services. With offices coast to coast and 2,400 personnel, Crowe is recognized by many organizations as one of the country's best places to work. Crowe serves clients worldwide as an independent member of Crowe Horwath International, one of the largest networks in the world, consisting of 150 independent accounting and management consulting firms with offices in more than 580 cities around the world.

SOURCE Crowe Horwath LLP