Is Your SUM adding up?

When the word comes down to “cut costs”, the first thing that an average fire-fighting Procurement department tends to do is focus on the “big spend” categories. These will either be the categories identified by the spend analysis/reporting system (if one is possessed), an external cost reduction consulting firm (who will do a “spend analysis” if retained), or, if neither is available / approved, the high-spend categories identified by Finance or the long-term Procurement professionals that know which events in the past typically came with the biggest price tags.

If the identified categories haven’t been sourced recently, chances are there are some savings to be had. But how much depends on current market pricing, how much inventory and production capability is in the supply base, current transportation costs, and a whole lot of other factors. If the cost has risen 20% since the last contract due to raw material surges, if demand can barely keep up with supply, or if fuel prices are soaring and the products are heavy, there may not be much savings to be had, even on a 100M category.

That’s why the real trick to cost reduction success is to focus not on the highest value categories, but the categories with the most cost reduction potential. In order to identify these categories, an organization will have to do should cost modelling on all of its high-value and mid-value categories, but first, it will need to get as much of its spend under management as possible. Until its Spend Under Management (SUM) is at least in the 80% to 90% range, it will be impossible to identify all of the relevant high-value and mid-value categories that need to be modelled in order to identify the most likely opportunities in the immediate future.

So ask yourself, is your organizational SUM adding up? Because if it’s 50% or less, half of your organization’s greatest cost reduction opportunities are passing you by.