Boardroom Chatter: Cost Reduction (Part 5 - Supplier Engagement)

Claire Taylor
Claire Taylor,
Over lunch, the CEO, CFO and CPO of a large corporation were discussing the topic of cost reduction.
CEO: (to the CPO and CFO) “You both said you think we can reduce costs just by streamlining the way we engage with our suppliers…let’s hear it – I’m all ears.”

CPO: “Within Procurement, our current approach to supplier management and communications are so cumbersome that I figure automating those processes could enable us to save in several ways (all conservative estimates based on our $100M total spend, by the way).”
  • $1.55M by using freed up time to address an additional 15% of our spend with professionally sourced agreements ($100m x 15% x $17% average savings)
  • $1.0M through an average 1% in price reductions by improving our negotiating position when renewing existing agreements because we become so much “easier to do business with”
  • $1.7M in realised savings against existing supplier agreements by being able to put all supplier catalogs in our e-procurement system where people will see and use them instead of buying off-contract (10% percent increase in on-contract buying x 17% average savings)
That’s a total of $4.25M just by making us more efficient so we can take advantage of savings opportunities we know are sitting there.

CFO: “We could save in Accounts Payable (AP), too. For us, it’s mainly from reduced administrative workload and the resulting opportunity to re-assign a few people to other functions outside AP.”

CFO: “Here’s my estimate for the first year – BEFORE we even put a big push on electronic invoicing with large suppliers…”
  • $43,500 by reducing .75 FTE currently allocated just to answering phone and e-mail supplier inquiries about the status of their invoices
  • $43,500 by reducing .75 FTE currently allocated to supplier data management – all of which is duplicate work to what procurement does
  • $145,000 by reducing 2.5 FTEs needed today to process paper invoices that we know we could turn into electronic invoices almost immediately (e.g. complex utility bills, small suppliers, etc.) 
That’s $232,000 savings from about a 25% reduction in AP in manpower costs. And I’m certain we can make further reductions over time with a framework for more electronic invoices.

CEO: “So between Procurement and Accounts Payable, we’re saying we could reduce costs a total of nearly $4.5M – do I have that right?”

CPO & CFO: “Yes – that’s what we’re saying – here’s the summary:”
  • $4.25M in Procurement by freeing up more time for professional sourcing, small price reductions because we’re easier to do business with and an increase in on-contract buying because we make it easier for employees to buy off preferred supplier catalogues 
  • $232,000 in Accounts Payable because we can re-assign several FTEs currently allocated to tasks that could be eliminated or greatly reduced
CEO: “That’s savings that would be directly added to our bottom line. I like that idea, but I have to say that I’m a little sceptical – why do we have so many people seemingly doing non-valued-added work today?”

CPO: “I’ve been talking with my Procurement people and here’s what they say…”
  • “I have to spend so much time on just qualifying and on-boarding suppliers – and then on keeping their information up to date – that I never have enough time left to run sourcing events in categories I know are going essentially ignored.”
  • “When I sit down to negotiate agreement extensions with suppliers, they always start out telling me how confusing and frustrating it can be to work with us – that always puts me on the back foot when I try to ask for their best price.” 
  • “Supplier catalogues are constantly changing – we don’t have the time to keep them up to date in our e-procurement system, so we just haven’t loaded many of them. That actually makes it harder for employees to buy from our preferred suppliers than to just go out, buy something, and expense it."
  • “The lack of complete supplier and catalogue information is really watering down the benefits we expected from e-procurement.”
CFO: “Here’s what I hear in Accounts Payable…”
  • “I know I’m spending a lot of time adding and updating the very same supplier information as someone in Procurement is doing – it seems to me like a big waste of time.” 
  • “I bet I spend half my time looking up invoice and payment statuses to answer supplier phone or e-mail questions. Sometimes I just have to ignore them, which I know doesn't exactly make them happy.”
  • “It can take me an hour or two to decipher, code and enter a single invoice sometimes – have you ever seen some of our utilities invoices?”
  • “A lot of smaller suppliers send invoices I know they just typed out or produced from a desktop accounting system. Information can be all over the place and there is often no PO number at all. There are so many times I can’t even tell what they are billing for without calling them.” 
CEO: “You two are giving me a headache with all these detail scenarios, but I think I get the picture.  What capabilities would we need to get the savings you outlined?”

The CPO and CFO combine their respective notes to make a list on the whiteboard:
  • A single electronic supplier directory that has all the information Procurement, AP and other departments need about all suppliers 
  • An online supplier portal that dramatically streamlines communication between us and suppliers 
  • Enable suppliers to register, maintain company and capability information, and keep their catalogue up to date themselves 
  • Enable us to post RFx documents and allow suppliers to submit responses online 
  • Enable us to post POs and suppliers to submit standardised invoices online 
  • Enable suppliers to access account information themselves 24x7 - 365 days a year
  • Tools to standardise and automate supplier qualification, performance monitoring and review processes
CPO: “One more thing… so far, we’ve focused ONLY on those things where we have predictable savings opportunities. The other big area this would address is supplier risk – something that is harder to quantify, but every bit as important…”

CPO & CFO: “If we had these capabilities in place we could also go a long way toward avoiding a number of bad possibilities with more consistent supplier qualification and monitoring:”
  • Operational disruptions as a result of supplier delivery or quality failures 
  • Liability and adverse publicity from failure of suppliers to comply with requirements like insurance, certifications, safety assurance, hiring procedures, etc.
A single supplier-related problem could easily cost us:
  • Hundreds of thousands of dollars in operational costs 
  • Lost revenue due to cancelled orders or even lost customers 
  • Long term loss of market share due to a damaged image    
To find out more about supplier management, click here to download the brochure.