Vendor Management & Supplier Cost Effectiveness: Case Study
Introduction
This vendor management case study is a good example of how RadiusPoint helps large organizations generate immediate and long-term cost savings. By conducting a systematic supplier cost effectiveness analysis and implementing sound vendor contract management practices at location/business unit level, RadiusPoint helps removing cost creep from our clients’ P&L.
Cost creep is the bane of CFOs and multi-location organizations often have a hard time identifying its origins. A typical analogy is water running through a colander: we know we are wasting money, but where to start plugging the holes?
As best business practices dictate, contract management usually is a top priority of vendor cost management methodology. And rightfully so, as individual business units/locations may not systematically refer to Corporate to source out vendors and service providers.
Our cost analysis specialists regularly stumble on “wild west” type procurement situations during TEM missions.
Indeed, our client’s executive team hired RadiusPoint to help evaluate supplier cost effectiveness and implement best procurement practices at business unit level after they started investigating one such situation. This is the topic of this case study.
Challenge
A global healthcare facility located in the United States and Canada, hired small individual cleaning companies to clean 300+ locations each week. Each location was responsible to hire and manage their cleaning service provider, and out of 300+ offices, only two locations had vendor contracts in place.
Opportunity
As corporate management reviewed the monthly invoices provided to Accounts Payable, they identified several areas of serious concern:
- Number of vendors: 363 individual cleaning service providers set up and managed in corporate AP software
- Number of invoices: 1,400+ invoices to be processed each month (363 invoices per week) as vendors billed and expected to be paid weekly
- Vendor management: Service costs varied both on services performed and location, with cleaning services provided depending on location.
- Cost increases: Locations did not contractually obligate cleaning companies, leading to highest costs and cost overruns.
Solution
RadiusPoint’s former e-Procurement portal referenced Atalian as a premier cleaning agency. Our healthcare client was eligible to take advantage of contract pricing previously negotiated with this vendor for all member companies of the e-Procurement platform. By contracting Atalian for each location, our client was able to generate immediate economies of scale with lower corporate-wide rates and the standardization of cleaning services.
What did we accomplish?
RadiusPoint analyzed each cleaning service provider’s invoices to identify a standard level of service needed for all locations vs. location-specific services. Once all services were defined by physical address, RadiusPoint examined the timing of the services to ensure that weekly cleaning services would happen within the required timeframe. Once all service types and all timing factors were reviewed and defined by location, Atalian could be contracted to meet the needs of all 363 locations.
Direct cost savings & further impact
- Monthly cost savings of $93,000
- Direct savings of 13.6%, i.e. $12,000+ per month and $131,056 annually
- Labor savings as 1400+ invoices were consolidated into 1 single monthly invoice
- Improved cash-flow management as cleaning services are now paid monthly instead of weekly
- Improved vendor management as a single vendor is now contracted vs. 363 non-contracted vendors
- Reduction in legal liabilities as all cleaning services are now managed under one roof through a single-vendor contract
- Improved business intelligence for Corporate
Vendor management & cost analysis
The mission our team was entrusted to conduct required a detailed and systematic analysis of cost and particulars. Analyzing invoices across 360+ vendors uncovered service cost disparities between locations.
Such disparities had to be normalized through a detailed service analysis. This step enabled us to establish a service baseline across location, the cornerstone of a corporate-wide approach to SLAs.
Identifying ‘outliers’ was the next step: services that are not standard across business units, but specific to certain locations due for instance to their size (medium vs. small), building configuration, and sometimes state regulations.
Only a systematic approach to supplier cost analysis will enable a large corporation to establish the right basis for vendor contract management purposes.
Procurement outsourcing
Our former e-Procurement platform was part of our BPO services and a major cost-cutting tool for our corporate members.
In this mission, we were able to offer an e-procurement solution right out of the box, with fully negotiated rates.
The selection process through which vendors go to be onboarded to the e-Procurement platform is a direct value-adding proposition for our corporate members.
From the cost analysis first performed by RadiusPoint proceeds a standardized service level definition that enables pre-vetted suppliers to offer best-in-class rates at a given service quality level.
Outsourcing their procurement missions generates efficiencies for our clients as the selection process is already done. SLAs are customized, as are compliance requirements.
Legal liabilities management
The diversity of state laws and regulations makes it more difficult for a corporate legal department to manage supplier-related legal liabilities, especially when business units do not resort to referenced suppliers to fulfill their needs.
There is always a risk that a local business unit sources vendors on its own, notwithstanding corporate policies and safeguards. Sound risk management policies take this liability into account. They seek to streamline procurement practices through a systemic approach.
E-Procurement platforms contribute to resolving these systemic issues by providing local management access to pre-vetted nationwide suppliers/vendors. Such vendors are fully on top of state regulations and local ordinances, and the attending legal liabilities are ultimately transferred to them through single-vendor contracts.
Compliance management
Likewise, compliance reporting duties can be negotiated and transferred to vetted vendors on the e-Procurement platform, thereby offloading this responsibility from the to-do list of a corporate legal department.
This is a crucial issue in the healthcare and financial services industries.
In the course of our TEM missions, we have found out that HIPAA compliance could be easily overlooked by local business units, a legal and financial liability nightmare for Corporate.
Reducing vendor numbers automatically results in harnessing compliance requirements, implementing best practices on a corporate-wide scale, and reducing both types of liabilities.