House of Procurement Promise

Strategic lever for bottom line improvement requires a comprehensive approach. Look at procurement as strategic rather than a cost centre.

With continued softness in the economy and increased competitive pressures, companies are finding themselves besieged by investors and corporate boards demanding stronger financial results. This escalating demand for enhanced performance, coupled with the rising scrutiny and scepticism of the financial markets, indicates that fresh and creative approaches are needed to improve bottom line performance and maintain year-over-year corporate growth.

House Of procurement is mainly concerned with how can companies most significantly impact their bottom line in the shortest amount of time? In a phrase: Measurable Cost Reductions. For a company enjoying 10 percent profit margins, an overall cost reduction of as little as 5 percent can impact earnings by 20 percent. While specific corporate results vary, the principle remains constant; saving money has a greater effect and requires fewer resources than making money. While companies are targeting long-term growth, internal changes can be made to generate near-term benefits. Further, these cost reductions can become a competitive differentiator, supporting progress and providing flexibility in an unpredictable market. As a result, many companies are looking with a strategic eye toward what has historically been a tactical function:

Procurement: A High Reward, Low Risk Opportunity

As companies weigh the relative costs of various methods to increase profitability, the value of cost reduction, through a more strategic focus on procurement, becomes self-evident. Companies typically spend between 50 and 80 percent of revenues on the procurement of external goods and services. Even small cost improvements to these expenditures can quickly yield significant bottom line benefits. And when correctly executed, these improvements can create sustainable year-over-year cost reductions to support continued profitability and growth.
While the financial impact of procurement is dramatic, the associated risks and costs are relatively low, especially when compared to other cost reduction initiatives such as decommissioning plants or layoffs. Rather than contending with the negative impact created by more drastic cost-cutting measures, procurement initiatives generate the best kind of results: positive reports of improved profitability.
So how can a company identify the highest impact cost reduction opportunities? To begin, they must understand what they buy and from whom they buy it. Thoroughly reviewing accounts payable history and mapping expenditures can provide tremendous insight into corporate savings opportunities.
In-depth analysis and classification of spend reveals the following common issues and findings:

• Companies buy the same or similar products from many different suppliers, which means they are not leveraging total company buying power and they are managing more suppliers than necessary.
• Companies have not fully defined product requirements or established standard SKUs for many items. In such cases, companies may be buying items that exceed their needs when a less expensive item is perfectly suitable.
• Companies have not established formal supplier agreements for a large number of product categories or optimized their sourcing efforts by engaging a broad supply base and creating a competitive negotiation environment.
• Even in cases where companies have implemented a formal sourcing process, compliance against negotiated contracts is often low, resulting in increased costs and supplier proliferation.

While these problems may appear overwhelming, there are a variety of solutions to address them and drive bottom line savings:

1. Increase customer leverage and buying power through intra-company aggregation and supplier rationalization.All too often, companies do not take advantage of their own buying power due to a simple lack of information. Many companies have grown through acquisition, resulting in disparate systems and unique site level processes that limit their ability to track company-wide spend. By harnessing intra-company expenditures and selecting fewer suppliers in each buying category, companies can gain significant leverage.
2. Drive further cost savings by rationalizing product specifications and establishing standard buying practices.Companies should ensure that they only purchase the products they need. Due to a focus on quality or a reliance on historical buying, buyers may inadvertently select products that exceed the requirements of the overall finished good. By developing processes that clearly define the need before translating that to a specification, companies can avoid unnecessary costs.
3. Source more effectively by engaging a larger number of qualified suppliers during supplier selection.When the time comes to renew a contract, companies now have access to eSourcing tools that allow them to expand the number of suppliers included in the initial selection process. The Internet, readily available supplier databases, and automated RFI tools have all significantly reduced the time required to identify and qualify suppliers, thereby enabling companies to engage hundreds of suppliers from around the globe in their initial evaluation, in hours rather than weeks.
4. Create a more competitive negotiating environment.When applied properly, additional e-sourcing tools, such as online auctions, help companies create a more competitive negotiating environment. Real time bidding and price transparency provided through e-auction tools give companies control of the buying process and drive major overall cost savings.
5. Improve financial controls and contract compliance.Even after selecting the best suppliers, negotiating the optimal contract, and improving supplier information, companies can still miss the opportunity to realize these savings. To fully achieve bottom line benefits, buyers need to buy against contracts quickly and easily and companies need to control spend activity through a procurement tool.

House Of Procurement: House Of Procurement: Getting Landed Costs

House Of Procurement: House Of Procurement: Getting Landed Costs: House Of Procurement: Getting Landed Costs : Global sourcing has become an essential element of enterprise strategies to reduce the cost of ...