Category Archives: Cost Reduction

Service Leaders Speak: Bernard Gunther of Lexington Analytics on “Reducing Bypass Spend”

Share This on Linked In

Today’s guest post is from Bernard Gunther of Lexington Analytics, a leading provider of spend analytics services for global procurement organizations.

Savvy sourcing managers are finding ways to uncover new savings despite spending freezes and heavy workloads. Just because the economy is suffering and budgets are frozen, it doesn’t mean you have a pass when it comes to demonstrating your value to the organization. In fact, it’s the perfect opportunity to show your stuff. You just have to be smarter and more creative about it.

One sourcing pro managed to reduce bypass spending and save over $100,000 a year by investing a couple of days of her time. You can bet this didn’t go unnoticed, especially during this economy.

Any sourcing manager looking to deliver value to the organization can do the same thing. Here’s how.

We’ll make three assumptions:

  1. You have some sort of spend analysis system*. You should be able to do this analysis whether you have a first-generation style data warehouse, use a third party to analyze your spending, or have a modern spend analysis tool. You just need basic spending information.
  2. You have done a deal with a selected vendor where you are now getting better pricing and quality for the same services than you were previously. You may have done this deal with a paper RFP or a very sophisticated optimization engine. You just need to know the pricing for the new deal.
  3. Some users in your organization are not buying from your preferred vendor. If you are covering a range of categories and have 100% compliance to all your deals, congratulations! This is a very rare accomplishment. Most organizations have some level of bypass or maverick spending.

If you have a good information system, the following should get done in a few days over a few weeks. If it takes you longer to get this done, you may look at your information systems. There is a great deal that can be done to make this faster and easier.

Here’s the process and some illustrative results:

  1. Pick a category where you have a preferred vendor with favorable pricing.
  2. Find the past year’s spending for this category. For illustration, let’s assume the category spending is $3 million.
  3. Estimate the opportunity. Let’s assume you have 70% compliance with your program. This means that there is a bypass rate of 30% (or $900,000). When you sourced this category, your preferred vendor saved you 15% on your rates. 15% savings on $900,000 is $135,000 — money worth going after. In addition, your incumbent could increase their business by over 40% — something that any vendor would be happy to do. If the opportunity is large enough, continue.
  4. Get the spending by vendor. Find the largest bypass vendor. Let’s assume this vendor represents one third of the bypass or $300,000 of spending. If you could move this bypass spending to your preferred vendors, you would save 15% of $300,000 or $45,000.
  5. Verify the opportunity. Obtain a few invoices for this bypass vendor. In the ideal world, you would be able to get a detailed file with all the specifications, quantities and pricing for this bypass vendor to make this analysis quick and comprehensive. But you don’t need to live in this world of perfect information to get results. Price out the invoices using your preferred vendor. If your pricing grid doesn’t cover the items in question, talk to your preferred vendor and see if they sell the items and can give you firm pricing. You may need to call this bypass vendor to understand the specifications and ensure you have an apples-to-apples comparison. At the end of the day, one of the vendors will have a lower price. If your preferred vendor is lower, you have the information to go to the business unit. If your preferred vendor is higher priced than this bypass vendor, you should use this information to get the preferred vendor to lower their price, generating savings on the rest of your spending.
  6. Estimate the savings for the largest business unit. Use your spending information to calculate savings for this business unit. Let’s assume this business unit represents half of the bypass spending with this vendor. This means shifting the spending would save $22,500 for this one business unit.
  7. Talk to the people in the business unit who used the other vendor. Find out why they use the bypass vendor and ask what it would take to use the preferred vendor in the future. Ask them if this extra money would be useful. (If they aren’t concerned about the money, perhaps the budget pressures aren’t as serious as you thought. Keep a log of “wasted spending”. When the next round of budget pressure comes around, you can haul out the list.)
  8. Reduce the bypass. Develop a plan to eliminate this bypass in the future. If this business unit regularly buys from the bypass vendor, this is straightforward. If you have tight and centralized ordering, work through the system. If this is an episodic purchase done by many units, you may need to let more people know about this preferred vendor and the savings opportunity.

If you did this once a month, you’d save $22,500 x 12, or around one quarter of a million dollars every year — easy money for a few days of work a month. And you still have 90% of your time left to do what you normally do.

So what’s stopping you?

Thanks, Bernard.

Overhead Cost Cuts Don’t Provide Long Term Savings

Share This on Linked In

I was very pleased to see this recent article in Purchasing that noted that “cost reduction efforts require more focus than sacrifice” because all too often I see companies blindly focussing on fixed cost reduction, which, in fact, just costs them more in the long run.

You see, when you cut travel, you cut the ability for your people to make, and maintain, relationships. When you cut entertainment, which is typically a very small budget to begin with, you increase stress, which decreases productivity. When you streamline operations, things start to slip through the cracks. Then when you cut workforce, you cut capability, key processes get skipped entirely, critical sourcing events just don’t happen, and you keep sourcing off of expensive ever-green contracts and spot-buying at high prices. When you cut training, your staff’s skills get even more outdated and your cost reduction efforts miss the mark. And when you cut compensation, your best employees feel unappreciated and trampled on, stop giving 100%, and start looking for their next job.

As the article says, you have much better opportunities, including:

  • transaction processing
  • supplier management
  • health care benefits
  • IT assets (hardware and software)
  • logistics

Plugging the Leaks in Your Contracts that Erode Your Savings

Share This on Linked In

A recent article in the CPO Agenda on how to “keep the value attached to your contracts” started of by noting that purchasers and suppliers are often disappointed by the results of strategic sourcing, as over half of the negotiated savings never materialize the vast majority of the time.

Over the past year, the CPO agenda has been conducting a global study across more than 600 companies (and 800 respondents from buy-side and sell-side executives and professionals). Based on the results of this research, they have devised a number of recommendations that they believe will help procurement leaders weather the challenges of today, position themselves for success and, most importantly, plug the leaks in their contracts. And some of their recommendations are pretty good.

In a nutshell, they recommend the following:

  • focus on developing sophisticated negotiation and supply chain management strategies and capabilities
    spend consolidation and e-auctions alone don’t cut it
  • take a more collaborative approach
    over 80% found their negotiations adversarial; furthermore, those who believe they were taken advantage of operated defensively, refused to share information, focussed on compliance rather than execution, and actively looked for ways to “make up losses”
  • balance the use of competitive sourcing and bidding with negotiation strategies that are more collaborative, fair and sustainable
    63% of the top performing buy-side study participants described their negotiations as collaborative
  • effective preparation is key
    leverage in negotiations is largely a matter of perception and structural factors have far less impacts on leverage than effective preparation
  • systematically assess leverage from multiple angles
    it’s just as important to understand your trading partner’s business model and strategy as it is to understand your own
  • take a structured approach to negotiations
    67% of top performers characterize their negotiations as structured and predictable while 69% of bottom performers characterize their negotiations as unstructured and unpredictable
  • adopt a formal supplier relationship management program
    organizations with these programs were found to realize 17% more value from their strategic sourcing efforts
  • align your internal stakeholders
    lack of internal stakeholder alignment was consistently touted as a top barrier to success
  • involve business and technical stakeholders
    a lack of involvement leads to internal stakeholders, and suppliers, trying to work around procurement processes and policies

Good advice. For more, see the article.

How Can You Save If You Don’t Consider All Your Options?

Share This on Linked In

A recent article on the Procurement Leaders Network had a very shocking statistic: “only 52% of businesses look at customs duties as a potential area for cost savings” (according to a recent research survey by Deloitte). Considering that misclassifications alone cause most companies to overpay duties by 7% to 11%, this presents a substantial savings opportunity for any company that imports more than ten million dollars a year. Furthermore, better utilization of Free Trade Agreements can often significantly reduce, if not eliminate, duties on millions of dollars of merchandise. Many companies have doubled and tripled their free trade duty savings (and saved millions of dollars) just through FTA management. And then there’s Free Trade Zones that can save you even more! With a little Trade Visibility, you can save a lot of money. So why aren’t you?

Go Green with Enterprise Content Management and Save

Share This on Linked In

Regular readers know I’m a big fan of green and an avid promoter of Enterprise Contract Management due to the many advantages it provides including reduced contract management costs, decreased maverick spend, reduced overpayments, IP management, etc., but in an even bigger picture, Enterprise Contract Management is a subset of Enterprise Content Management. If you also adopt an Enterprise Content Management Solution to manage all of the documents, and knowledge, you produce in addition to contracts, you can save a considerable amount of money each year on paper, printing, storage, and document shipping costs … which, for many larger organizations, is well into the the six figures. While small change to what an Enterprise Contract Management Solution that enforces on-contract buying (which in turn realizes the millions in savings your buyers negotiated), it’s still a considerable amount of change, as there are many good, open source, content management solutions you can use for free and save enough to retain a few more valuable employees in these tough times.

There are a number of reasons to go green with Enterprise Content Management, and a recent article in Integrated Solutions Magazine listed the top 6 reasons presented by the Association for Information and Image Management (AIIM). They are:

  1. Save On Paper and Shipping
    A large company can save 50K to 500K on paper and 50K to 200K on paper delivery and document shipping costs each year.
  2. Increase the Effectiveness of Core Processes
    Your people can find what they need when they need it.
  3. Truly Integrate Your Field Operations
    No longer is the bulk of knowledge confined to those in the main office.
  4. Reduce Real Estate Costs
    Less paper requires less filing cabinets which reduces the physical space you need just to store paper.
  5. Improve Employee Productivity
    Not only can your people access what they need when they need it, but they can access the information where they need it.
  6. Reduce off-site storage costs.
    Instead of a warehouse, all you need is a storage box that can hold a few backup tapes or hard-drives, just in case your on-line backup goes down.