Achieving Procurement Savings. What do you believe are the most important activities for Procurement in an organisation to achieve savings? Creating short-term savings initiatives or embarking in sustainable long-term cost elimination?
The answer to this question is — both. However each require a different approach and each have different implications. Let’s begin.
How does procurement create short-term savings initiatives?
Short-term savings are usually related to immediate spend control where a spend element can immediately be stopped. Such items are often related to reduction in labour cost (permanent, contractors, or consultants), products, and services.
However, before pulling the big stick, through some analysis, organisations should be in a better position to understand the various cost elements that contribute to revenue and profit before taking drastic off-the-cuff measures. Through some analysis, these cost elements can be better understood in terms of cause and effect relationships, profit contribution, and even market positioning. Once understood, there is then an opportunity to re-focus the organisation “energy” toward more profitable channels and activities.
Once that causality and value chain of revenue contributors and cost contributors is mapped, a re-allocation of resources toward more profitable activities should be engineered. This means a new enterprise reference architecture needs to be developed. If you are not familiar with Reference Architecture modelling, it acts as a model for describing, organising and showing the desired relationships between the capabilities of an organisation from business, information systems and technical perspectives — and creates a common understanding of what an enterprise can and should do.
In this particular case, the role of procurement is to present not only the cost of products or services for a particular category or commodity which is usually achieved via Category Management, but also the “cost of doing business” internally (people, processes, technology supporting a particular product or service) and externally (such as logistics, business development, sales etc). All of which are valuable contributors to procurement savings.
What we have found at BvW Global is the lack of organisational pulse — meaning companies have difficulties understanding causality of business relationships and quantifying in $ and time terms the various value chains embedded within their organisation. As a first port of call, and whether the organisation is in need of immediate cost savings or not, cost contributors needs to be documented, monitored and managed.
Note: We are not suggesting price reductions from supplier in this article nor a reduction of human resources. Both of these cost elements carry negative implications and long-term implications that require careful ongoing management.
How does procurement generate long-term sustainable cost elimination?
Long-term cost elimination refers to a deeper business transformation rather than a quicker re-allocation of resources and processes. This approach takes the view of eliminating functions, activities, and steps for any input // value add // output activities. The role of procurement is to offer alternative ways of engaging with suppliers and to develop alternative ways for internal stakeholders to work with suppliers to achieve procurement savings.
This is a fairly large topic to cover, however at a high level the goal is to strategically create a culture of ongoing improvement and cost management for a new category of spend and/or for a new supplier. For example, are orders being placed by your organisation’s staff, or are orders automatically fulfilled because the supplier has integrated its systems to your inventory levels? Another example would be invoicing, does the invoicing follow a traditional 3-way approval match or is invoicing based on RCTI or pre-approved spend where each line item is electronically matched against pre-approved daily, weekly, monthly maximum order levels and pricing — thus eliminating cost elements from both the supplier and buyer.
Often, the role of procurement is to identify suppliers, go to tender, issue and manage contract, and act as a buffer between internal stakeholders and suppliers. However the role procurement can and should take is to become the internal ‘Cost Management Agent’ and ensure that revenue and profit can be maximised not by asking suppliers to continuously reduce their prices but by working strategically together with suppliers and internal stakeholders as an extended-enterprise to eliminate cost elements throughout the entire value chain.
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