Back to Basics: Six Ways to Generate Cost Savings
Is it possible to successfully generate cost savings with limited resources?
Procurement Consultant Brian Goodall explains how going back to basics can be highly effective.
Procurement Managers will often find themselves juggling a number of priorities and responsibilities, including creating and delivering cost savings, managing strategic supplier relationships, reducing supply-side risk, sourcing products and services, and managing key stakeholders. The list is much longer, but the number one reason companies employ Procurement Managers is to generate cost savings and deliver value for money on the procurement of third party provided goods and services.
The Procurement function has never been richer for best practice tools and techniques, excellent procurement systems, high quality training, and specialist procurement consultancy expertise. Of course, not all Procurement Leaders have access to these functions, therefore there is still the potential for procurement departments to under-perform. However, with the right techniques this can be avoided.
Imagine a football or rugby team exploring ways to bring about performance improvement: a natural direction would be to go back to basics. Equally Procurement Managers can rely on six basic methods of generating cost savings:
1. Aggregate Spend
Competitive leverage can be achieved by combining and aggregating spend of the same or similar products and services under a single supply agreement. Try exploring suppliers who can offer multiple products and services.
2. Change Suppliers
Competitively re-bid your supply contracts, introducing a wider range of competing suppliers. Explore global suppliers from lower cost countries and suppliers with lower overhead structures including best-in-class SMEs.
3. Cost Analysis and Cost Challenge
Analyse the make-up of the price and elements of the Total Cost of Ownership (TCO) to identify real product material costs, service delivery costs, shipping costs, other miscellaneous fees and charges, and margins. Benchmark and challenge your suppliers to justify their costs.
4. Change the Specification or Scope of Work
Reduce the specification, scope of work, and service levels, and work with your stakeholders to challenge the specification. An effective method of challenge is to undertake risk and impact assessments, to identify more cost and risk balanced specifications. Be flexible to adapting and exploring the use of commercial off-the-shelf (COTS) products, rather than custom designed products; this will require close co-operation with your suppliers and product design stakeholders.
5. Optimise the Supply Chain
Collaborate with your stakeholders to look at the composition of the internal and external Supply Chain, to identify avoidable direct and indirect costs. Always challenge accepted practices.
6. Avoid the Spend and Optimise Cash Flow
Use up existing stock, reduce stock levels, and reduce opportunities for obsolescence. Avoid product duplication, and minimise the range of products available to be purchased. Assess whether your fiduciary control is tight enough.
An effective Procurement Manager will undertake savings opportunity assessments, and prioritise those that can deliver the highest savings, and are easiest to implement. Don’t forget to undertake risk assessments whenever introducing major changes, and plan to mitigate for any identified adverse impact.
Throughout these processes, it’s important to work closely with your key and extended stakeholders. This will generate positive collaboration and confidence, resulting in positive and committed stakeholders to your vision and plans.
Brian Goodall is managing consultant at White Rose Business Services and Associate Consultant at Sourcing Solved