A strategic approach to procurement can make savings that directly impact the bottom line, without beating up your suppliers in the process, says David Kendall.
Today’s markets for indirect expenses are a moving target. The key to saving costs across all categories of indirect expense is to ensure that your cost profile is always aligned with, or ideally better positioned than, the marketplace and companies of a similar size and expenditure level. Most companies are highly skilled in procuring raw materials, resale products and human resources. Rarely, however, do they apply the same strategic procurement approach to indirect expenses. Any savings that can be made across these 100-plus cost categories are essentially pure profit, and it doesn’t take many wins to make a significant impact on the bottom line and net value of the business.
Cost isn’t everything of course; service and quality is equally if not more important, but there are some simple steps that you can take to achieve a happy medium, potentially without even moving supplier.
First, it’s important to plan your strategy and approach for indirect costs at the budgeting stage. If you just base your forecasts on the prior year, you could be forced into reacting to contract renewals or issues as they arise. When it comes to renewals, many companies renew early, but this is often influenced by brokers who are trying to secure their commission for the coming period.
There should be only two drivers for early renewals: the need for year-on-year cost savings and a defined need for fixed budgets. If neither apply, it would be better to re-tender a few months down the line than make a wrong and costly decision. Deals shouldn’t be longer than 12 months unless there is a cost saving – after all, nobody has a crystal ball for where the markets are going.
Top tips for making savings:
- Consider warehousing solutions. Businesses are increasingly adopting 3PL (third-party logistics) solutions, which can remove huge fixed overheads and replace them with a variable cost that is contingent on activity.
- Beware of over-specification. Many procured products are over-specified, and better value alternatives are available. Packaging is a case in point: why use double-skinned corrugated cardboard boxes where single skin would suffice?
- Look at non-branded products. Companies often buy expensive branded products, such as printer cartridges and janitorial products, where comparable generic lines would do, at a fraction of the price.
- Understand charging structures. Charges for communications such as mobile and fixed-line phones can be unnecessarily complex. Savings of 30-40% in these areas can be achieved if you understand the components that make up the overall charge. Invest a little time in trying to understand the mechanisms.
Then there’s volume-sensitive pricing to consider. Are you actively managing your indirect cost profile – i.e. obtaining monthly activity reports from suppliers and monitoring your profile? Pricing for most indirect costs is volume-sensitive, but it doesn’t take much for activity levels to deviate from the agreed rate. Suppliers are often quick to penalise under-activity but are rarely proactive in correcting their pricing for increased volumes.
It’s worth keeping a keen eye on this to ensure you’re getting the appropriate rate. Another challenge is the increasing consolidation
among suppliers as large corporate vendors expand into different markets and products. If you see your volumes are increasing with a particular supplier, you could suggest a rebate mechanism.
Nearly all suppliers are familiar with this structure, and it can yield some meaningful payments if spend levels are high enough. If you’re part of a group, it’s also worth considering group deals. Rarely are indirect costs managed congruently and consistently across all locations. We often see different offices paying different prices and buying different products. You should aim for one deal, one invoice, with one account manager, and implement simple controls to monitor activity.
What about your tendering process? It’s not ethical to ‘beat up’ your suppliers, and it will damage valuable relationships. The markets dictate what you should be paying, so you need to test them via a tender process. Be fair to the suppliers – don’t go through a tender process if you have no intention of migrating. Set out your success criteria from the start, and by all means include the current supplier. Offer the final two or three suppliers a meeting and select the optimum solution. Tender blind and create a request-for-proposal document for high-spend areas.
Last but not least you need to manage risk. You should ensure you have backup suppliers for indirect costs that are critical to your supply chain. The tender process will help you identify these. If you build the above considerations into your strategy, you should be able to drive efficiencies in your procurement.
Remember, it’s often a buyer’s market in the indirect cost space, and there is no commercial reason for paying over the odds.
Article by: David Kendall
This is an article from Insight & Innovation: Issue 1 – click here to read the whole newsletter.