In this 4-part series, we address the four fundamental questions finance executives should ask about their organisation’s purchase-to-pay process in order to drive savings. In Part 3, we ask “Are you Getting the Best Value For What You Are Spending?”
No matter what your annual expenditure level, you want to get as much for your organisation’s money as possible. You want the lowest prices and best overall value for everything you buy. That’s why your procurement people research suppliers and negotiate contracts. Studies have shown that 10-15 % savings are easily possible when purchases are made through pre-established suppliers. It’s simple: once good suppliers are identified and contracts set, you want as much of your spend to go through those suppliers as possible.
An important way for you to get a handle on how effectively your organisation is using its money is to ask: 1) How much of our spend is with preferred suppliers and contracts; how much is not? And 2) What information do we have when we negotiate supplier contracts? Do we capture detailed information about our spending over time (e.g. on what, with whom, and at what prices).
Why it’s Important
What to Look For – Key Indicators
- You don’t want to pay more than necessary: Every time someone buys something from a supplier other than one with whom you have a favourable contract, the price savings you worked hard to negotiate are lost.
- You want the best overall value: Price alone is not always the only criteria for selecting the best supplier. When an employee buys something from an unauthorised source, they may not understand how to evaluate other important dimensions such as quality, delivery or payment terms. What may look like a “good price” might actually cost more.
- You want to avoid undue risk: Another factor in selecting a supplier is the potential risk they might entail in terms of their ability to ultimately deliver the product or service they sell. If your performance to your customers relies on their performance to you, you want to be sure you know the supplier well before selecting them. In some cases – especially with outside service providers – there could even be liability transferred to your organisation if they don’t meet certain regulatory requirements.
- You want to fully leverage your spend: If employees around your organisation are buying essentially the same product or service from many different suppliers (e.g. stationery), you are losing a lot of buying power. By consolidating those purchases with fewer suppliers, your volume with them goes up; making it much more likely that they will agree to discounts based on the higher level of business you provide them.
- You want to continuously improve: If you don’t have any good way of knowing what is being spent by category, supplier, etc; your procurement people do not have the basic information they need for activities like contract negotiation and supplier consolidation that can lead to further savings over time.
How to Improve
- Percent of spend under management: This is the measure of how many purchases are with what you consider your preferred suppliers – typically ones with whom you have a contract specifying negotiated prices or discounts. A high percentage is, of course, what you’re after. If it’s low; discuss why that is.
- The number of active suppliers in your vendor master file: If you have many suppliers in the same category with whom you’ve paid invoices over the past year, that may indicate lost opportunities for volume discounts. If the number is expanding over time, the lost opportunities may be growing.
- Reporting ability: Ask your purchasing or IT manager to produce a report that summarises the money you’ve spent per supplier for key product or service categories. Talk with your purchasing manager about whether or not he feels well-equipped with the right data when he goes to negotiate a new supplier contract.
- Identify and focus on preferred suppliers: Clearly identify the one or few suppliers you want to use per category. Your procurement professionals may already be well down the road on this. If not, start with those suppliers with whom you have formal agreements.
- Make them known to employees: Again, you may already have this process in place, but if not, provide a reasonable way for people to look up the supplier they should use for a given purchase.
- Develop an understanding of the importance of using preferred suppliers: Be sure everyone who initiates purchases understands the importance to your organisation that they first consider a preferred supplier and only look elsewhere if absolutely necessary.
- Capture all purchase history: If you are not already doing so, initiate a process by which you capture enough detail about all purchases for later analysis. You probably already have total spend per supplier, but you will want to categorise that at a lower level of detail (category, commodity, etc) in order to make the information as useful as possible.