After payroll (and direct materials in the case of manufacturers, distributors and retailers), the biggest source of cost in almost all organisations is the procurement of the expense items, outside services and capital items needed to support your organisation’s operations – the items that represent the “cost of doing business”. This is usually referred to as indirect procurement.
Therefore, understanding the processes involved in how your organisation purchases these indirect goods and services can provide real insight into how you can do this more efficiently and cost effectively, ultimately with the aim of driving greater savings to the bottom line.
The scope of the business process is pretty straightforward:
- Employee purchase request or requisition
- Manager authorisation (or denial)
- PO placement
The primary goal of this process is to ensure only necessary and appropriate purchases are made; that they are made with clear managerial visibility of the impact on budget; and that they are made with preferred suppliers (i.e. suppliers with negotiated purchase agreements) whenever possible.
Receipt of goods or acknowledgement of service completion
So, how are you performing?
There are a few key questions you and your team can ask yourselves to give a ‘rough cut’ estimate of the savings potential.
- What is our ‘addressable’ annual spend?
- What percentage of addressable spend do we feel could be avoided?
- What percentage of addressable spend is spent with suppliers with whom we do not have price agreements?
- What is an ‘average’ percentage price reduction that we gain when we negotiate volume discounts or perform simple competitive bidding processes?
- Therefore… what is the amount of potential savings that can be achieved by ensuring all spend is authorised?
- Therefore, what is the amount of potential savings being lost due to purchases being made ‘off-contract’ and with no competitive bidding process?
To investigate your purchase authorisation processes in more detail, including how you are performing, what’s ‘holding you back’ and what tools and capabilities are required to gain effective control and visibility of the purchase authorisation process, download our Spend Awareness Action Pack
or visit proactis.com/resources
to find a wealth of documents and tools you can use to develop a more in depth assessment and strategy in this area.