Boardroom Chatter: Cost Reduction (Part 1 - Sourcing)
Over lunch, the CEO, CFO and CPO of a large corporation were chewing the fat. Topic: Cost Reduction
CEO: “We spend $100m a year – how can we get better prices on more of what we buy without lowering quality or increasing risk?”
CPO: “At one level, it’s pretty simple… Right now, about 25% of our total $100M spend is against formal contracts and we save an average of 17% across those contracts. That’s a savings we’re already getting of $4.25m. If we could increase that percentage to 60% - which is entirely possible – we could save another $5.95m (+$35m x 17%).”
CEO: “That’s a big number – I’m not sure I can believe that’s possible. How would we do that?”
CPO: “We would attack the problem in a couple of coordinated ways:
CFO: “I’d like to add… I know our people don’t always use the contracts we already have. In order to actually realise that savings, we would also need to:
- More strategic sourcing events each year for high value, critical items – we can only do so many today with the tools and resources we have.
- More procurement-assisted competitive bid processes for spot buys of high ticket items and significant outside services – right now the departments often do that themselves because they feel we’ll just drag out the process.
- Consolidate our purchases of certain categories into fewer suppliers to gain larger volume discounts – we've got many different suppliers for the same basic things across our different business units today".
In addition, we should:
- Establish better ways to ensure people actually use the contracts Bob’s people negotiate – that certainly is not always the case today.
CEO: “That all sounds great, but my question is: Why aren’t we doing those things today?”
- Somehow let people know when we already have what they need in inventory before they buy it again.
- For certain things like IT equipment, steer people to the right “expert” who can correctly evaluate what they really need so they don’t over-buy or buy something that doesn't end up doing the job."
CPO: “I’ve been talking with my people over the past month about that and here’s what they say…”
“I also went out and talked to employees around the company and here’s what I heard from them…”
- “It takes us a LONG time to work with the department people to put together a good RFP/RFQ, send it out, get responses, compare them, and select the best supplier – there’s a lot of internal communication, supplier communication and paperwork involved in order to do it right and get the results we want.”
- “I often get major service contacts sent to me to that are already laid out in detail before I even see them. If I just knew about them earlier, I know I could help get better agreements that would be much more likely to stay within budget.”
- “I know how to negotiate good supplier agreements, but I’m not a technical expert on every subject. I wish we could come up with a better way to team up with the right people in areas like IT, marketing, etc.”
- “There are certain kinds of products and services where I’m afraid to even entertain a new supplier – even when their prices keep going up – because I just can’t take the chance that a new supplier would be reliable.”
CEO: “OK… so OTHER THAN doubling the purchasing staff, what kind of tools would we need in order to address these issues? Let’s make a list:
- “If I got purchasing involved every time I buy something, we’d never get anything done around here – it just takes too long.”
- “We’ve always bought those things from those guys – I know they use other suppliers in other regions, but what does it matter?”
- “I like to get the best price for anything I buy, whether it’s for myself or the company. But sometimes it’s just too inconvenient or I don’t even know we have a discount with certain suppliers.”
- Electronic RFP/RFQ document and workflow templates that would accelerate and standardise the competitive sourcing process for various categories of goods and services. That would enable us to do more events each year AND be confident we’re being thorough in our evaluations.
- A supplier portal in the cloud to much more efficiently publish RFP/RFQ’s and accept responses electronically; also to do reverse auctions for commodity type items.
- A combined repository of supplier information and purchase activity so we can gain a clear picture of what we’re buying and from whom. Then we can do some rationalisation and focus our sourcing activities on gaining higher volume discounts.
- Several different methods to make it easier for employees to use existing supplier contracts without the need to involve purchasing:
- A central contract file tied into our eProcurement system that automatically points people to the right supplier and agreement for what they are buying.
- Workflow that automatically routes requests for certain technical items or services to functional “experts” who can quickly evaluate employee needs against existing supplier agreements and even existing inventory. IT hardware, software and services are a good example.
- Employee purchase cards (PCards) that make it easy for them to buy commodity items from the right suppliers when they are on the road. E.g. Gas/petrol, hotel, and office supply charge cards.
- A process within eProcurement that automatically routes certain purchase requests to the right purchasing agent for a “quick quote” process with basic information provided by the requester."
- CPO & CFO: “If we had those capabilities, in place we could consistently GAIN and MAINTAIN something like that extra $5.9M savings, PLUS:
- Always incorporate supplier evaluation points that reduce risk of both poor performance or indirect liability.
- Give our category experts more time to seek out even better suppliers over time.
- Improve the whole company’s productivity by enabling people to get what they need at the best price with less wasted time.
- Reduce unnecessary or inappropriate purchases completely.
If these challenges sound familiar to your organisation, check out PROACTIS Sourcing
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