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)
It is crucial to preserve any cost savings, 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.
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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. Taking the time to identify strategic suppliers and consolidating the total number of suppliers 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.
- 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 over-reliance on a particular group of suppliers. Whilst the aim should always be to consolidate the supply base, one of the key ways 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 with purchasing outside the terms of the supplier’s contract or framework agreement. Organisations should monitor all purchases to comply 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 re-occurring.
- 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: Spending on training Staff to become more empowered and make better decisions for an organisation can improve the bottom line over the long run. For instance, investing in enhancing negotiation skills can make for better supplier relationships and easier 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 give improved access to supplier catalogues, ensuring a better range of product choices, ultimately leading to increased savings.
- Inventory Levels: Having high stock levels in a warehouse will not make any profit and costs to store it. 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.
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More articles can be found at Procurement and Supply Chain Management Made Simple. A look at procurement and supply chain management issues to assist organisations and people in increasing the quality, efficiency, and effectiveness in the supply of their products and services to customers' delight. ©️ Procurement and Supply Chain Management Made Simple. All rights reserved.
