The analysis of an
organisation’s spend will need to split the spending into separate groups and
descending levels of priorities, for example:
- Strategic Items (High Value + High Market
Complexity/Supply Risk)
- Leverage Items (High Value + Low Market
Complexity/Supply Risk)
- Bottleneck Items (Low Value + High Market
Complexity/Supply Risk)
- Non-Critical Items (Low Value + Low Market
Complexity/Supply Risk)
Preserving any cost savings
is crucial, as these can easily be lost. So often, the top line of cost savings
is gleefully celebrated without much thought about how the organisation will
realise the savings.
Strong commercial management
skills can assist the organisation in maintaining and increasing those hard-won
cost savings. Several ways of doing this could be:
- Supply Chain Consolidation: Managing suppliers is critical to
maximising cost savings. Identifying strategic suppliers and consolidating
the total number of suppliers an organisation uses increases the purchasing
function's leverage. Reducing supplier selection during the purchasing
cycle can save time and money.
- Reduce Maverick Spending: Maverick spending, or allowing
people to select or use suppliers without any thought, can account for up
to 25% of purchases made within an organisation and could potentially
reduce the chances of maintaining cost savings.
- Improve Risk Management: Every organisation has business
risks. One of the largest is overreliance on a particular group of
suppliers. While the aim should always be to consolidate the supply base,
one key way to manage risk is to ensure that an organisation reduces its
reliance on major suppliers.
- Reduce Internal Costs: Streamlining processes can reduce
operational costs. Purchasing should collaborate 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
purchasing approach that identifies spending patterns by categorising
spending streams and allocating a category to each type of spend. It
assists an organisation in finding opportunities to save money and cut
internal costs by reducing multiple similar transactions and consolidating
the number of purchase orders and invoices processed.
- Contract Management: Spend leakage occurs when
purchasing outside the terms of the supplier’s contract or framework
agreement. Organisations should monitor all purchases to ensure compliance
with the contract and payment terms. If non-compliant purchases cause
spending 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 or services, the supplier's bid should
include how they will solve the organisation's demand issue and provide the
most competitive pricing. However, designing and writing these proposals,
also known as specifications, can take time and effort.
- Demand Management: Research shows that every £1.00
an organisation spends on supply management returns £6.77. By decreasing
demand, an organisation can achieve the highest cost savings by reducing
overall product or service 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 decisions for an organisation can improve the
bottom line over the long run. For instance, enhancing 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-purchasing software and
other technology to communicate more speedily and efficiently with the
supply chain will improve access to supplier catalogues, ensure a better
range of product choices, and ultimately lead to increased savings.
- Inventory Levels: High stock levels in a warehouse
will not generate profit and incur storage costs. The longer the stock
sits, the more deteriorated it becomes, with a higher chance of
obsolescence. Maintaining a close eye on inventory levels ensures it
rotates with the first-in, first-out principle to reduce waste.
As organisations face
ever-increasing cost management issues, they must review their current and
future spending requirements. Not conducting a financial review will incur
costs 7 – 9% (£2.1M - £2.7M) higher than the open market within a £30M annual
budget, thus increasing the organisation’s internal cost inflation rate. Over a
typical four-year Framework Agreement or Contract budget of £120M, an
organisation’s costs will increase by £9.3M - £11.2M.
Additional articles can be
found at Supply Chain Management Made Easy. This site looks at supply
chain management issues to assist organisations and people in increasing the
quality, efficiency, and effectiveness of their product and service supply to
the customers' delight. ©️ Supply Chain Management Made Easy. All rights
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