Category Archives: Cost Reduction
If the Supplier Walks Away Whistling …
… simply put, you didn’t do a very good job. While the supplier should be walking away from the table with a hint of a smile on their face, as you want a positive relationship, if they’re whistling a jaunty tune and dancing to it, you got suckered. And these days, it’s happening all too often.
As per this recent post on the SCM blogs by James Baehr of Greybeard Advisors on how last minute bids and contract extensions can limit leverage, contracts are being benignly neglected. Procurement professionals are too busy issuing quick bids and placing orders based solely on price. As a result, the decision criteria is generally limited to price and Procurement finds itself with little, if any, room to negotiate for a better whatever. Furthermore, many buyers have taken to simply extending existing contracts, sometimes two or three times. This leaves money on the table and compromises leverage since the organization generally becomes more dependent on the supplier from whom they are no longer getting the best price. It’s not long before Procurement is stepping over dollar bills to pick-up pennies and the supper is walking away from the table with a jaunt in his step, whistling a happy tune …
Headline From the Land of D’OH: Bypassing Proven Supply Sources Invites Unacceptable Risk
Really? I did not know that! Tell me more! 
Don’t we all know this by now? Needless to say I was a little disappointed when I saw this headline in Industry Week on “bypassing proven supply sources invites unacceptable risk”, one of my favourite publications in recent times as they usually avoid the obvious diatribe I expect from the WSJ (and used to expect from the now deceased Purchasing) and focus on the core issue, such as how to maintain quality and proven sources of supply in tough times.
There wasn’t a single sentence in the article that I don’t think we all know by now. We know cheap often translates into poor quality, lack of service, and all too often as of late, recalls. We know that production line downtime costs tens or hundreds of thousands of dollars. We know that moor Procurement needs to meet regularly with Engineering and they have to work together to maintain the necessary budget.
What we need is advice on how Procurement can stave off the incentive to “go for the lowest cost no matter what” when the top line design and production managers know that the associated costs of such a decision far outweigh the savings. We need some advice on how Purchasing can qualify the total cost and risk associated with a decision and show that “the 10% cheaper solution will in fact cost the company 10% more”. We need a discussion of cost modelling, optimization, and simulation that can be used to demonstrate the true total costs.
And when health and safety is on the line, we need the reminder that even the simplest of parts can spell disaster. Remember, it was a single O-ring that resulted in the Challenger disaster. That’s right, a single vulcanized rubber part brought down a Billion dollar piece of equipment. We can’t overlook quality, but until the cost of poor quality is quantified, uneducated business leaders will continue to do so. So let’s teach our buyers about cost modelling and optimization every chance we get. It’s the only way we’re truly going to end this view of relentless cost cutting as business as usual.
A Hitchhiker’s Guide to e-Procurement: Summary
Mostly Harmless, Part XXV
EIPP, P2P, e-Purchasing, and e-Procurement. What does it all mean?
This series provided a basic introduction to the world of e-Procurement. Each of the phases was discussed and key requirements were highlighted. In addition, the series also overviewed some of the primary challenges associated with each phase, some best practices to overcome those challenges, and some of the benefits the organization could also expect to see. While it was not intended to be complete, it is a great start for anyone embarking on an e-Procurement journey.
In addition, it also provided some great advice on how to compute the total cost of ownership of a system under consideration, how to analyze the efficacy of a solution relative to the organization’s procurement model, how to determine it’s appeal from both public and private sector viewpoints, and how to differentiate a system from EIPP, P2P, and e-Purchasing imitators.
A true e-Procurement solution is a very rich and powerful solution that will automate the tactical back-office process from start to finish, greatly decreasing the resources that must be assigned to tactical tasks, and associated processing costs. Considering that many studies have found that an e-Procurement solution can reduce the cost of invoice processing by as much as 98%, and that a manually processed invoice costs an average organization between 50 and 120 dollars, the transactional savings alone can be enormous. But these savings can be dwarfed when maverick spend is greatly reduced and new opportunities for savings are identified from the centralized warehouse of organizational purchases. An ROI of 5 or more is not out of the question if the right solution is selected and utilized properly.
So if an organization does not have a good e-Procurement solution, it should get one today. There are over a dozen providers in the space with good solutions (and many have been reviewed in the vendor post archives), and at least one of them should be the right fit. For more information on e-Procurement, there’s also the e-SourcingWiki Paper, which, in addition to a brief overview of the cycle and core capabilities, also overviews some important features of e-Procurement solutions in addition to more challenges, best practices, and benefits. In addition, it also has a brief glossary of standard procurement terms. (And, for even more information, one can always check out the Procurement Innovation archives here on Sourcing Innovation.)
That’s all for now, folks. Feel free to flip back through the series and read it again.
A.T. Kearney Confirms Huge Savings Potential in Indirect
A.T. Kearney recently released the results of their “Indirect Procurement Study” (IPS) that analyzed indirect procurement across 94 multinational companies with a combined indirect spend of $134 Billion which suggests that indirect procurement categories like IT, marketing and advertising, facilities management, MRO, Logistics and professional services have become increasingly important to Chief Procurement Officers. This is good news considering the huge savings opportunity it represents as indirect spending accounts for 60% of third-party spend in non-manufacturing companies, more than 90% in the financial services industry, and sometimes 50% of spend in manufacturing organizations.
Like any other A.T. Kearney or Big Consulting study, it’s jam-packed with lots of results, statistics, findings, and conclusions, but there’s one finding in particular, which was picked up by this recent article in logistics management, that really gets the message across:
The most successful indirect procurement organizational model was a central-led organization with collaboration across business units. Users of this model achieved savings greater than 10% over the last two years in 47% of categories.
In other words, if you’re best in class, you can expect to save at least 10% on at least 25% of your spend, or 2.5% of your total spend. (Worst case, you’re manufacturing with only 50% indirect spend. You save 10% on half of those categories, which is 25% of all of your categories.) If you’re spending at least 100M annually, that’s at least 2.5M, and that’s nothing to scoff at! And if you’re using a real data analysis tool, it won’t take you long to find it either!
For some great tips on where to look for indirect savings, if you haven’t already, download the recent Sourcing Innovation Illumination on Strategic Spend Visibility. It’s definitely worth the read.