Procurement Outsourcing — Explained + Services and Examples

Procurement Outsourcing vs Business Process Outsourcing (BPO)

While both procurement outsourcing and business process outsourcing involve the handover of functions to third-party service providers, they differ significantly in range, scale of operations, and ultimate objectives.

Below are some of the key distinctions between the two strategies:

Examples of Companies Who Embrace Procurement Outsourcing

Across various corporate landscapes, companies may choose to outsource procurement for a number of reasons, such as leveraging lower production costs, optimizing logistics functions, accessing specialized expertise, and more.

Here are a few examples of companies that embrace procurement outsourcing:

1. Unilever

Unilever embraces outsourcing through the services and expertise of Accenture to optimize operations in its HR function. Unilever aimed to allocate its efforts to core activities, such as the development of new products and the acquisition of new companies.

For this reason, Unilever chose to outsource HR, allowing outsourcing professionals to address the opportunity to lower production costs, allowing them to produce products under brands that meet the standards and preferences of their consumers.

2. ExxonMobil

ExxonMobil is one of the world’s largest oil and gas companies. Due to the large-scale nature of its operations, ExxonMobil has employed outsourcing methods in its procurement processes to manage specific operations, such as sourcing and logistics.

This approach allows ExxonMobil to optimize its supply chain, reduce costs, and leverage expertise from third-party sources to enhance its procurement processes.

3. Nike

Nike, a leading footwear and apparel brand, utilizes outsourcing so that it can focus on product design, innovation, and marketing while accessing the expertise of outsourcing professionals.

Most of Nike’s products are manufactured outside of the United States, allowing the company to reduce overhead costs by outsourcing globally. Outsourcing allows Nike to leverage cost reduction through sourcing, manufacturing, and logistics.

4.  Outsourcing of Private Label

Another common area for outsourcing is the procurement of private-label products within the FMCG (fast-moving consumer goods) market. Companies like Daymon and AMS-Sourcing specialize in this practice and are often utilized by retailers. 

By collaborating with these specialized companies, retailers can benefit from their extensive knowledge of the private label market, including European markets, and their expertise in areas such as raw material prices. 

Additionally, these companies can often secure goods at lower costs due to their ability to purchase in larger volumes, giving them greater buying power. I strongly recommend that every procurement director explore working with such companies, as it can lead to competitive prices and high-quality products for retailers.

Key Benefits of Procurement Outsourcing

Outsourcing can be impactful in assisting various processes. In procurement, outsourcing delivers multiple benefits to organizations, suppliers, and the procurement process itself, such as:

1. Leveraging access to expertise

Companies might consider procurement outsourcing when they don’t have the specialized expertise and skills needed to complete processes. Procurement outsourcing providers have teams of experts who can provide valuable insight and expertise in various areas of procurement, such as supplier relations, contract management, and risk mitigation.

2. Cost savings

One of the main reasons companies choose procurement outsourcing is to reduce costs. External service providers typically have scale-driven cost efficiency and expertise that can help reduce costs, allowing them to negotiate better deals with suppliers, shorten lead times, and enhance procurement processes overall.

3. Focus on core activities

Companies can transfer some or entire processes to procurement outsourcing providers, enabling them to free up internal resources and redirect focus onto their core activities.

External service providers can take on non-core functions of the process, maximizing the efficiency of procurement functions and allowing companies to concentrate on their core initiatives.

4. Risk management

Procurement outsourcing providers can effectively identify and address risks in the procurement process through robust risk management systems that help in addressing supply chain disruptions, market fluctuations, supplier inconsistencies, and others.

By extension, procurement outsourcing providers can effectively manage risks while ensuring business continuity.

5. Improved supplier relations

Procurement outsourcing providers can improve supplier relations by thoroughly evaluating key performance indicators (KPIs), track records, and terms of potential suppliers to ensure that companies have the right suppliers.

Furthermore, procurement outsourcing can significantly impact supplier negotiations by leveraging their expertise to negotiate better terms and secure the best deals.

Navigating the Risks of Procurement Outsourcing

While procurement outsourcing delivers multiple benefits, it also comes with several risks. Companies need to be aware of the potential risks of procurement outsourcing to effectively address them and navigate long-term solutions.

Below are some of the common risks involved in procurement outsourcing:

1. Perceived loss of control

A common concern in procurement outsourcing is the perceived loss of control. Organizations might be deterred from implementing this strategy because of the perception that outsourcing necessitates giving up control and visibility over procurement activities.

However, these risks can be mitigated through well-defined formal agreements and organized leadership structures.

Solution: Emphasize clarity in your procurement outsourcing strategy through clear communication in formal agreements, properly designated roles, defined responsibilities, and comprehensive monitoring to effectively manage potential risks and concerns.

2. Supplier-related issues

Supplier-related issues revolve around performance issues, supplier dependency, compliance concerns, risk management, and more. Organizations must be aware of these concerns when allowing external service providers to take on procurement functions.

Addressing these risks is essential in managing a successful procurement process. Without supplier reliability, procurement processes suffer, inhibiting organizational growth and preventing companies from building resilient supplier relationships.

Solution: Active engagement in supplier relationship management prevents specific issues from arising. This involves creating clear outlines of performance standards, diversifying the supplier base to reduce dependency, communicating objectives, and enhancing supplier selection systems.

3. Data security and confidentiality

Data security and confidentiality risks in procurement outsourcing refer to the various risks associated with outsourcing activities. The shifting of confidential procurement data, such as supplier information, procurement contract details, and pricing terms, comes with a series of security risks that could have damaging outcomes.

Failure to address these risks can have negative consequences that could result in massive security breaches, data vulnerability, damaged reputational image, and legal issues.

Solution: Implement robust data security systems and confidentiality contracts, ensuring that third-party service providers act in compliance with security and data protection guidelines. Adherence to security protocols and data protection guidelines is critical for maintaining strong supplier relations.

4. Hidden costs

While procurement outsourcing offers cost-saving benefits, hidden costs or unforeseen fees may counteract those benefits. For instance, when considering procurement outsourcing, companies may be deterred by the financial impact it can have on business expenses.

Hidden costs can include unexpected service fees, transitional expenses, as well as renegotiation fees related to contractual terms. Failure to account for costs can negatively impact corporate spending and offset the financial benefits of outsourcing procurement.

Solution: Ways to address hidden cost issues include thorough cost-benefit analysis, monitoring of outsourcing relations, clear outsourcing terms, transparent pricing systems, and defined contract negotiations. These proactive strategies will allow organizations to manage hidden costs effectively without compromising any of the benefits.

How to Outsource Procurement

You’ve explored the challenges, solutions, and benefits of procurement outsourcing strategies. Now, how exactly do you implement it? Below are five key steps you need to take to effectively outsource procurement.

1. Analyze your procurement needs

Firstly, you need to identify your procurement needs. Ask yourself why you want to outsource, and which functions. This is part of conducting an analysis, which will involve evaluating your current procurement processes and supply chain management strategies.

From there, you will then assess which aspects of your procurement activities you want to outsource, this can encompass supplier selection, contract management, supplier relationship management, or any other procurement function.

This step will provide you with a clear understanding of your specific procurement needs and will allow you to establish the next steps.

2. Define your goals

Once you’ve established your procurement needs, you can define your goals. What does your company aim to achieve? Consider opportunities for cost savings, enhanced supplier performance, shorter lead times, expert insight, and other factors.

Outline your objectives for outsourcing procurement based on your specific needs. A clearly outlined set of goals will help you define supplier standards, contract agreements, and transition details.

3. Choose a service provider

Choosing the right service providers is crucial to the success of your outsourcing process. In selecting the right service provider, consider factors like performance records, experience, reputation, pricing terms, and range of services.

This will help you determine whether potential service providers have the right qualifications and capabilities to meet company standards, enabling you to select the right service provider from the beginning.

4. Formulate a detailed contract

Once you’ve determined the previous steps, your next objective is to formulate a detailed contract. Developing a comprehensive outsourcing contract enables companies to establish clear guidelines and policies that will ensure compliance and reliability.

Formulate a comprehensive contract outlining the range of services, key performance indicators (KPIs), data security, and exit strategies. Clarity in legal agreements also ensures that the outsourcing structures consistently meet your procurement objectives.

5. Transition and follow-up

The transition phase is the final step in outsourcing procurement and revolves around transferring tasks and other responsibilities while making adjustments and monitoring for continued improvement.

During this phase, actively engaging with your external service provider is crucial for a smooth transition. Provide enough resources and data, proper training, and comprehensive monitoring relative to performance metrics.

Conclusion

In a fast-paced corporate world that highlights the need for efficiency, procurement outsourcing offers several advantages. It is a strategic approach to the enhancement of procurement processes, allowing companies to optimize functions while also reducing costs and effectively managing supplier relationships.

Assigning specific procurement tasks to third-party service providers gives companies access to expertise and other benefits such as better cost savings, risk management, strong supplier relationships, and increased focus on core activities.

By extension, companies that outsource procurement effectively can leverage the various benefits to keep up with competitive business and evolving markets. Conclusively, procurement outsourcing can be the key to staying competitive while building continuous success.