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 to build business profit, that means procurement cost savings need to 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. Consolidation of the supply base often means that an organisation is able to secure volume discounts and higher quality Products, Services and Works but because there are fewer suppliers to manage overall, the purchasing process becomes more efficient.
- 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 important 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 certain 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 is able to 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 though categorising spending streams through the allocation of a category to each type of spend, it assists an organisation in finding opportunities to save money and to cut internal costs by reducing multiple transactions that are similar, consolidating the numbers of purchase orders and / or invoices that have to 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 with purchasing that falls outside of the terms of the Suppliers contract or framework agreement, organisations should monitor all purchases for compliance with the contract term, including payment terms and if any non-compliant purchases are made that cause spend 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, 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 an onerous process.
- 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 of cost savings through the reduction of overall Product, Service and Works 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. Investing in training to improve negotiation skills, for instance, can make for better supplier relationships and easier contract management. Employees are after all, an organisation’s biggest asset, so investing in them and their professional development is in the organisation’s best interest.
- Technology: Use of e-procurement software and other technology to communicate more speedily and efficiently with the supply chain and supply base will give improved access to supplier catalogues ensuring a better range of product choices 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 with the higher chance it has of becoming obsolete. By keeping a close eye on stock levels ensures that it is rotating with the first in, first out principle so there is little waste.
Good procurement function management is necessary to ensure an organisation remains profitable, keeping an eye on procurement cost or efficiency savings opportunities gives an organisation more freedom within its budget to invest its financial resources in ways to help the organisation grow.
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