The importance of a strong marketing function is universally recognized, and every company invests enormous effort in “out-thinking” the customer. But how much energy is the corporation, as customer, spending to out-think suppliers marketing to it? The answer in many cases is not much. Most companies have historically neglected the “reverse marketing” function (or “purchasing”), and many Fortune 1,000 companies waste several hundred million dollars each year as a result.
In the 1980s, many manufacturers instigated a purchasing overhaul. However, they focused on purchases that typically fall within the purview of purchasing departments, namely, “direct” purchases or “cost of goods sold.” The vast array of expenditures dubbed “indirect” purchases went almost untouched. A model of purchasing excellence emerged that eschewed free-market competition in favor of supplier “partnerships.” In some cases, companies extended the notion of partnership to cover areas in which it had little applicability. As a consequence, they sheltered many large supplier relationships from rigorous competitive scrutiny and seldom realized the potential economic leverage from hard-nosed reverse-marketing.
During the past few years, some firms — particularly in the service sector — have acknowledged the chronic neglect of indirect purchasing and are redefining canonical approaches to the subject. Companies such as American Express, Sears, and Chemical (nowChase Manhattan) Bank have launched campaigns to tackle indirect purchases head on, using various free-market approaches. The results of these campaigns are impressive; they include a greatly improved understanding of and control over what is being purchased and a 10 percent to 15 percent reduction in the expenses reviewed without any changes in quality or functionality. The bottom-line impact of these dollar savings is obviously material. In a case in which indirect purchases represent roughly 33 percent of operating expenses (not atypical for many companies) and net profit is roughly 10 percent of revenues, a 15 percent reduction in indirect purchases translates into a 50 percent improvement in profits.
We base this article on the phenomenal success of such campaigns. First, we review the scope of the rationalization opportunity. Indirect purchases — for example, mainframes, advertising space, health care benefits, and legal services — represent a significant part of any company’s cost structure. Yet, as they have seldom received adequate attention, they will probably survive the current wave of reengineering unscathed.