04/24/2012 09:08 am ET Updated Jun 24, 2012

The New Procurement

Despite a slow growth global environment, a manufacturing renaissance is underway, abetted by a relatively weak dollar, the collapse of the price of natural gas, and -- most importantly -- efforts by manufacturing companies to be globally competitive. The results are greater productivity, dramatic increases in profits and a fanatical focus on innovation.

Behind manufacturing's transformation are five techniques for raising revenues, improving margins and reducing costs: expanding globally through export and foreign country platforms; product and process innovation; techniques for raising productivity; better training and use of human capital; and adding to or spinning off parts of the organization.

These techniques are rooted in the total quality movement initiated by W. Edwards Deming and implemented fiercely within Japan. Companies have built on these techniques over the years, continuing to improve quality, drive out waste, reduce cycle time, reduce costs and increase the value embedded in every product and activity, most recently through lean manufacturing. The challenge is to take high performing organizations to the next level by incorporating value-focused techniques such as lean manufacturing into every aspect of the organization, driving advances in other critical business processes such as consumer management, end-to-end supply chains and procurement.

One of the largest hidden performance improvement opportunities is in procurement. Companies can unlock a new level of performance by comprehensively managing procurement and applying lean techniques to optimize every dollar spent. Indirect procurement, which includes HR services, corporate services, plant supplies and services, IT and travel is the most overlooked area for cutting cost and expanding margins. According to The Hackett Group, these indirect expenditures account for roughly one-third of total revenue.

Unfortunately, most companies have not leveraged the techniques they've applied to the procurement of direct materials or lean manufacturing throughout the corporation, principally because this spending is highly fragmented and difficult to get a handle on. But by moving beyond efficiency focused efforts and comprehensively addressing these expenditures with expertise and lean techniques, manufacturers can negotiate more than a margin point in savings, close process gaps to ensure these savings are realized and achieve supplier innovation and continuous cost improvements.

To address this untapped area, many progressive manufacturers, like The Timken Company, are leveraging third party specialists that can bring expertise and technology to hundreds of spending areas on an accelerated basis. The best in breed company in this space, in my opinion, is a Philadelphia firm called Procurian.

By comprehensively managing procurement, manufacturers have an opportunity to produce goods at home while significantly reducing costs through better management of indirect spending. If procurement is properly managed, the next generation of cost reductions won't be found by simply shifting production abroad, but by applying a comprehensive approach to extract more value from spending, to improve business results and fuel growth.

Jerry Jasinowski, an economist and author, serve d as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.