Procurement – The Time Is Now

Recession means a myriad of different things, look at the current marketplace; we see numerous examples of dated retail outlets going into administration.

 

At its most valuable, recession is a time to tidy, a time to reduce waste and target inertia. This should happen both externally, across the marketplace and internally, within your business. Exponential economic growth can breed commercial lethargy, when things start slowing down only the truly competitive will survive. There are many things you can do to increase your businesses competitiveness, procurement cannot be overlooked as one of them.

• Are you paying too much for your stationary?
• Do you know what margins your suppliers are working to?
• Are you owed volume triggered pricing reductions?
• Have you exhausted price leveraging options?

Ok, so it does not sound as dramatic as macro level economic decline, but the application of a few fundamental procurement principles can hugely affect your businesses bottom line. It does not matter what industry you operate in, who your suppliers are or what your turnover is: procurement will deliver value and benefits. View this period of economic instability as a great opportunity, review, update and change.

Procurement activity falls into two loose camps: cost savings and cost avoidance. The phase before these activities can be identified is both simple and straightforward but absolutely key to procurement review success. Understanding; you cannot effectively attack your costs if you don’t know what they truly are. Understanding your spend categories will help you design and prioritize your savings strategy and tactics. There are a number of generic tactics that should be considered, the decision to implement being fundamentally led by: business size, number of stakeholders, category spend, supplier fragmentation, buyer fragmentation and contractual status.

Phase One: Understanding

Gather historic spend data (6 to 12 months) and group the categories of spend. Anything linked to your core product or service should be highlighted as direct spend and things that fall outside that indirect spend. Commonly, direct spend is well (or better) managed and the quickest savings can be made within indirect spend areas (stationary, travel, facilities management, property, professional services, marketing, IT, telecommunications, HR etc). Savings opportunities found in this area may not be the most profitable, but they are likely to be easy to implement and quick to deliver. Any supplier contracts or purchasing agreements in existence should also be gathered during this phase.

Phase Two: Cost avoidance tactics

Validate category spend and stop all costs deemed as unnecessary. Every business has maverick spend, find the source and stop it. Look specifically at any retainer fees (fixed monthly fee commonly used for the payment of professional services/agency time) and check that you receive what was agree and that it is still necessary.
Increase supplier payment terms to positively impact your cash flow. 30 days is commonly used but anything up to 60 is now deemed reasonable.
Many suppliers will try and raise their prices annually (some biannually). Question every price rise proposed and use your leveraging power (committed volumes, increased volumes, loyal purchasing) and market knowledge to delay or fully resist proposed price increases.

Ensure all those making purchases within your business always push for waived fees (delivery fee, an installation cost or additional staff training following the purchase of a new system). Now, more than ever, your suppliers should be fighting for your custom – use that to your advantage.
Explore options for product or service substitution within your business. This could be within either the direct or indirect categories but involves finding another product/service that is functionally equivalent but cheaper to produce. Implement all substitutes where appropriate. Use this tactic to also prompt the review of purchase specifications. Ensure that you are not specifying (and therefore paying for) product/service capabilities that are not used or no longer required.

Holding inventory costs your business money. Review how much you have and how much is actually necessary. Any process or systems revision that reduces the amount of inventory held at any one time is a cost saving. This tactic will not deliver significant instant savings, but all inventory is associated with a carrying cost so over time inventory reduction will deliver savings. When sourcing new suppliers be sure to consider the lead-time they offer and the impact on your inventory arrangement.

Look at your internal processes and try to reduce inefficiencies. Again, this will not lead to huge, quick savings, but processes do consume overhead and that costs your business money. Any process improvement that reduces the consumption of overhead is a cost avoidance.

Phase Three: Cost savings tactics

Guided by phase one spend analysis, look for supply base fragmentation (similar product/service being purchased from numerous suppliers). Categories that show supplier fragmentation should be consolidated and either given to the lowest cost existing supplier or re-sourced. Higher total volumes and spend increase your leveraging power and should be used to push price reduction.

Identify your top suppliers (varies dependant on supply base dynamics but normally those suppliers that account for 50% of your total spend) and request a price break down from them all. Make it clear that you need full transparency on what it is you are being charged. Common areas to challenge and change:

• The supplier’s margin. Is it reasonable, not in excess of the industry average?
• Overhead attribution (if applicable). Is it reasonable, not in excess of the industry average?
• Ensure the supplier does not mark up any third party costs (these should be passed to you at no additional charge)
• Ensure you understand each component of cost, are you being charged for miscellaneous items (management fee) that have no clear link to your purchase brief or desired business outcomes?
• Should you uncover unfavorable pricing with non-negotiable suppliers, consider re-sourcing

In categories with long standing suppliers you must check that your rates are still competitive. The telecommunications and energy markets for example have opened up hugely. Prices that were once competitive, even 12 months ago, are likely to now be dated.  Price comparison data, in these areas particularly, is widely available so benchmarking your prices is fast and straightforward.

Review all your existing supplier contracts and agreements.

Firstly, check you are being charged as per contract, look for volume based pricing mechanisms or kick back clauses (cash paid to you from the supplier based on repeat business/specific volumes etc). Make sure you claim all that you are entitled to.

Secondly, create a list prioritizing supplier re-negotiation or re-sourcing. The list should be based on: your total spend with that supplier, the specific industry conditions (recent reduction in the cost of a raw material?), the contract award date and the contract termination options. Work through the list over the given period, again ensuring that you redefine the purchasing brief/scope of work and service level agreement. Consider your new business objectives in the current market place and make sure you align your supplier deliverables.

Mandate your travel policy (if applicable to your business) to ensure all travel is; necessary, booked online, booked in advance and is in the appropriate standard or class.

Look for opportunities to partner with strategic suppliers. Those suppliers that can impact your business (and vice versa) may well be interested in setting up strategic partnerships. The benefits these will deliver vary but may include: price reduction, risk mitigation, profit share, lead-time reduction, payment flexibility, and increased quality.

Phase Four: Successful Implementation

Engage all stakeholders, motivate them to activate and support the desired changes. The motivational methods you employ here will vary depending on your businesses size etc. Consider selling the benefits and value of procurement with an internal marketing campaign.

Set savings targets and track and review them monthly. Illustrating progress and delivery to your bottom line will help maintain stakeholder engagement.

These tactics can be short, medium or long term and are presented as generic. All procurement change must be considered in the individual context of your business. Always judge the implicated risk of a change and ensure you are comfortable with it and have appropriate scenario planning in place.
You can stop reading now. There is a strong argument for procurement so you need to get to work! Look at your spend and then consider which tactics are going to be most successful for your business. Even if you only initiate one over the next month, you will be surprised just how many savings the right one will produce. Remember, to your bottom line £100 sales profit means the same as £100 supplier savings.

Written from India by Liz Freeman who operates as an independent procurement consultant.