PROACTIS Blog

Santa's Procurement Strategy & Savings Opportunity

Charlotte Sutton
Charlotte Sutton,
PROACTIS
The North Pole operation, sometimes known as Santa Inc., has a large operating budget. Whilst their financial data is sensitive, it is estimated to be in excess of $50 billion per year. We wondered what the potential would be for cost savings and any positive impacts through the use of modern eProcurement solutions and best practice. 
Like most large corporations, Santa and the elves are far too busy working on making dreams come true for the world’s children to assess any possibility of cost savings. However, global population is growing - estimates have put the total population (younger than 15) at 7.3 billion in 2015, and 9.3 billion by 2050* - and, whilst we do not accurately know the percentage of naughty and nice children, we can be sure this is placing increased pressure on Santa’s operation and supply chain. 
 

Indirect Procurement


Santa Inc. is no ordinary company. However, if it is like many other organisations, it is likely they will have extensive experience in managing their direct supply chain, but have neglected or even failed to address their indirect procurement. For example, typical retail organisations spend as much as 15% of net sales on indirect materials or services. Often, it is not addressed in a systematic way due to a high level of fragmentation - too many categories, long tail of suppliers, etc. 

Whilst, Santa Inc. does not have any sales that we are aware of (however there are rumours that Santa owns a franchise of sweet shops in China) and much of their spend will be on Goods for Resale (toys from retail stores, wholesale clubs and direct purchases from the manufacturer), we expect indirect procurement to account for as much as 60% of the volume of all their purchase transactions. 

Don’t be fooled. It might appear as though Santa’s supply chain is ‘virtual’, however a large number of diverse products and services will be needed to support the operation, including the purchasing of: 
  • Temporary elf workers
  • Business supplies
  • Elite reindeers (and hiring trainers, vets, farriers and stable attendants)
  • Specialist sleigh and liability insurance
  • Personal protection (for breaking into people’s houses and dealing with the non-believers)
  • Child happiness detector devices
  • Milk and cookie safety testing 
  • Utilities and workshops etc.

Therefore it is clear that optimising indirect procurement could deliver Santa substantial cost savings. 

According to analysts, a reasonable goal is to capture between 80-90% of indirect spend that is discretionary**. Santa Inc. should look to increase the Total Addressable Spend which can be verified “on-contract,” that is placed with approved suppliers to negotiated, contracted prices. 

If Santa Inc. could increase their level of procurement performance from “average” to “best-in-class” it may be possible to achieve 75% of spend under management (from 60%), realise 17% savings from sourcing efforts (from 9%), and 76% compliance to negotiated agreements (from 53%)***. 

In addition, Santa Inc. could slash purchasing costs by removing paper-based processes and applying automated workflow: 
  • Administration costs could be lowered by 70% as a result of web-based purchasing
  • An average purchase order cost of $60 could be reduced to as little as $5 to $15
  • Straight-through processing of invoices can result in 90%+ efficiency savings etc.
Every dollar saved will go straight to the bottom line and enable Santa Claus to fulfil his obligations of providing gifts to those on the nice list.
 

Complex Distribution


It is believed, that some of the toys delivered by Santa Inc. are produced in one of seven assembly lines around the world, the most well-known being located at the original plant in the North Pole. 

In order to manage the production and distribution of over 1.9 billion toys around the globe, Santa Inc. will have operations in Africa, Antartica, Asia, Australia/Oceana, Europe, North America, and South America.

We anticipate that each geographic business unit is currently responsible for its own purchases. It is likely that Santa Claus empowers individual business units with autonomy and control over their own processes and design decisions. Whilst this allows for a quick sourcing process and speedy issue resolution it also has a number of disadvantages: 
  • It does not allow the full corporate spend to be leveraged
  • There may be little co-ordination or information sharing between units with best practices generally not propagated
  • Uneven supply costs and performance across the organisation
Furthermore, operating costs will be high due to extensive duplication of effort and resources in the Procurement and Accounts Payable functions.

We suggest Santa Inc. evaluates the benefits of moving to a centre-led procurement and Spend Control model.
 

Other Supply Chain Challenges


It is likely that Santa Inc. will be facing a number of supply chain challenges, for example:

The quantity of Genetically Modified (GM) magical sweet crops grown across the globe has increased rapidly and it’s becoming difficult to ensure a continuous and guaranteed supply. Given the limited number of supplies and GM sweet crops and anticipation that this will continue, the sourcing and monitoring of suppliers will be paramount. 

In addition, Santa will be facing increasing regulatory pressure to work with suppliers to measure and report environmental impacts. This includes reducing the carbon footprint of toy packaging.
 

Conclusion


The opportunities for savings are there for Santa Inc. – they just need to be clearly identified and prioritised. Whilst there are opportunities for really large savings in a few ‘big hit’ areas, much of the opportunity will come from incrementally addressing ‘pockets of opportunity’ by methodically addressing them one at a time. The approach to addressing each opportunity will vary; with each requiring a different combination of technology capabilities and business process improvements.

With that understanding in mind, the essence of our approach to working with Santa Inc., for the specific purpose of squeezing savings from their indirect procurement, would be as follows:
  • Identify and prioritise the opportunities for savings with an early emphasis on ‘quick-hits’ that have the greatest return in the least time - PROACTIS Rapid Spend Review
  • Establish a P2P environment that makes it easy for elves to buy from the preferred suppliers, contracts, and catalogues, whilst ensuring compliance with purchase controls -PROACTIS Purchase-to-Pay
  • Help free up time to apply professional procurement processes ‘further down the tail’ of spend by streamlining ongoing sourcing, supplier management, contract management, and PO generation processes - PROACTIS Source-to-Contract
  • Dramatically reduce the percentage of invoices received in paper form and requiring manual entry by incrementally applying appropriate methods across the various segments - PROACTIS eInvoicing
PROACTIS has hundreds of man-years’ experience helping a broad spectrum of organisations reduce and better control their spend. 

In five minutes, learn how PROACTIS solutions can deliver Santa greater bottom-line value.
 
*Source: United Nations, Department of Economic and Social Affairs
**Source: Gartner “Top 21 Critical Questions for Evaluating and Implementing eProcurement,”
***Source: Aberdeen Group “Spend Analysis: Pulling Back the Covers on Savings 2008”