The open market is the greatest
innovator of service and quality, but when an open tender is carried out, it is
also the best way of securing the greatest cost savings. However, effective
supply chain management is crucial to preserving those hard-won cost savings
and building business profit, so procurement cost savings must be a priority. Procurement
effectiveness and efficiency must be maximised to maintain profits at their
highest level.
It is crucial to preserve any cost
savings gained as these can be lost without much difficulty, as so often the
top line of the cost savings is gleefully celebrated without much thought as to
how the organisation is going to realise those cost savings, it is here that
good, strong robust commercial management skills can assist the organisation to
maintain and potentially increase those hard won cost savings, several ways of
doing this could be:
- Consolidate the Supply Base: Supplier management is critical
to maximising cost savings, as taking the time to identify strategic
Suppliers and consolidating the total number of Suppliers that an
organisation uses, increases the leveraging of the purchasing function, it
can save time and money as Supplier selection is reduced during the purchasing
cycle. Consolidating the supply base often means an organisation can
secure volume discounts and higher quality Products, Services and Works.
Still, the purchasing process becomes more efficient because there are
fewer suppliers to manage overall.
- Reduce Maverick Spending: Maverick spending, or allowing
people to select or utilise Suppliers without any due thought, can account
for up to 80% of purchases made within an organisation and could
potentially reduce the chances of maintaining cost savings. Analysing
spend patterns will allow those patterns to be highlighted. Training and
advising staff will shepherd people into using the most cost-effective
Suppliers whilst increasing the openness, transparency, and probity of
spending patterns, as favouritism and bias hinder effective organisational
spending.
- Improve Risk Management: Every organisation has business
risks, one of the largest is over reliance on a particular group of
Suppliers, whilst the aim should always be to consolidate the supply base,
when possible, one of the keyways to managing risk is to ensure that an
organisation doesn’t depend too much on a major supplier. This means
paying close attention to contracts, following up with suppliers and
taking action to avoid supply chain and logistical issues, having a backup
supplier available to cover the most critical Products, Services and Works
is essential, part of risk management also means focusing on cost
avoidance which is a form of savings, focusing on ways to reduce the rate
of cost increases or negotiating contracts with value added services such
as reduced minimum order values and free delivery are attractive ways of
saving unnecessary spending. It is also perhaps just as important
though to ensure that any Supplier risks are passed through the
organisations supply chain to the end user or customer, such risks could
be ISO, CE or legal compliance to specific standards, Supplier contracts/framework
agreements must be constructed to ensure that these are adequately dealt
with to avoid these costs being assumed by the organisation.
- Reduce Internal Costs: By streamlining processes, an
organisation can reduce operational costs. Procurement should work with
organisational Teams to define transparent processes with improved
visibility and detailing of overall spending and data accuracy.
- Use Category Management: Category management is a
procurement approach that identifies spend patterns. However, categorising
spending streams by allocating a category to each type of spending assists
an organisation in finding opportunities to save money and cut internal
costs by reducing multiple similar transactions, consolidating the number
of purchase orders and/or invoices that must be processed. Spend
Categories also assist in the identification of spend patterns, and as the
number of Spend Categories is usually greater than the number of cost
accounting codes, the analysis of spend using Spend Categories is nearly
always more accurate and provides a greater degree of detail than that of
any cost centre spend analysis.
- Contract Management: Spend leakage occurs when
purchasing falls outside the terms of the Supplier's contract or framework
agreement. Organisations should monitor all purchases for compliance with
the contract terms, including payment terms. If any non-compliant
purchases cause spend leakage, the organisation should work to put
controls in place to prevent it from recurring.
- Tender Management: Tender management is part of any
good sourcing strategy, when an organisation offers numerous Suppliers the
opportunity to bid for Products, Services and Works, the Suppliers bid
should include how their organisation will solve the organisations demand
issue and will if an open tender is carried out, provide the most
competitive pricing, however the process of designing and writing these
proposals, also known as a specification, can be onerous.
- Demand Management: Research shows that for every
£1.00 that an organisation spends on supply management provides a return
of £6.77 in real terms. By decreasing demand, an organisation can achieve
the highest cost savings by reducing overall product, service, and Work
consumption, which can reduce or eliminate hidden costs. This is
especially important when considering products like laptops, smartphones,
or the leasing of company vehicles.
- Staff Skills: Training staff to become more
empowered and make better organisational decisions can improve the bottom
line over the long run. For instance, investing in training to improve
negotiation skills can improve supplier relationships and contract
management. Employees are an organisation’s biggest asset, so investing in
them and their professional development is in the organisation’s best
interest.
- Technology: Using e-procurement software and
other technology to communicate more speedily and efficiently with the
supply chain and supply base will improve access to supplier catalogues,
ensuring a better range of product choices and ultimately leading to
increased savings.
- Inventory Levels: Having a lot of stock sitting
around in a warehouse is not going to make any profit. Not only this, but
it costs money to store it, and the longer it sits, the more deteriorated
it becomes and the higher the chance it will become obsolete. By keeping a
close eye on stock levels, you ensure that it rotates with the first-in,
first-out principle, so there is little waste.
Good procurement function management is
necessary to ensure an organisation remains profitable. Monitoring procurement
costs or efficiency savings opportunities gives an organisation more freedom
within its budget to invest its financial resources to help it grow.
Additional articles can be found at Procurement Made Easy. This site looks at procurement issues to assist organisations and people in increasing the quality, efficiency, and effectiveness of their product and service supply to the customers' delight. ©️ Procurement Made Easy. All rights reserved.
