Spend Control – Introducing Cost Effectiveness

Improve the bottomline with cost control techniques

A successful company generates profit but also knows that it must keep cost lean. Spend control is one of the easiest ways of helping an organisation maximise efficiencies.

Spend control and transparency: The first goal of any procurement organisation is to ensure it has a complete and accurate picture of its spending, that all information is continuously maintained and the database is accessible for procurement professionals across the organisation. Bringing full spending visibility under one roof leads to higher rates of compliance, to the point that maverick spending becomes almost extinct.

Going beyond savings delivery: The goal is to identify the full savings potential and the steps that can be taken to capture those savings. To this end, leaders analyse category and cost structure, as well as the supplier landscape for each category. They conduct category workshops to verify findings, develop initiatives for each category and estimate the savings potential of each initiative. The results can be impressive.

As part of this process, successful companies look for quick wins and assess initiatives on an ease-of-implementation basis.

Invest to better understand its markets and suppliers, which helped it effectively negotiate prices. The company consolidated volume, designed to cost and developed integrated systems for total cost of ownership.

Establish corporate and cross-functional interfaces. For example, procurement needs to work closely with the business, operating towards common targets and motivated by common KPIs, all managed through a rigorous process that incorporates feedback from internal customers. As required, companies make organisational changes to help them meet customer needs.

Category management and supplier management are the two most important processes for achieving sustainable results.

Procurement begins with a single step: performing a basic diagnostic to learn, in important detail, where you’re starting from and what you stand to gain by taking the journey.

Ask yourself the following:

  • How much do you spend on third party spend?
  • With which suppliers are you making these purchases?
  • To what degree is the procurement department involved and contributed to the cost reduction
  • How would you assess the value of procurement against cost reduction initiatives and what improvements could be suggested?
  • Are suppliers put through a consistent competitive or tendering process?
  • What post contract management is undertaken to realise the contract benefits?
  • Do you have a P2P process that works, what improvements can be made?

Most established companies with a procurement function will have tactical spend control measures in place. However, it is surprising that sometimes organisations can still lack some basics because the culture is that procurement is viewed as a blocker rather than an enabler and strategic partner.

Perception and reputation are two things that take commitment to change. Don’t start by promising the world and under deliver. Instead, make a simple pledge to do things better with a one-page summary outlining your strategic vision.

How does procurement impact the bottom line?

Be natural. When a new requirement comes up offer your support and begin undertaking some competitive sourcing to help you stakeholders achieve their objectives. Most companies operate a hybrid approach of centralised procurement and devolved activities. Where it is devolved make sure your templates are up to scratch. Where it is centralised your templates need to be near perfect. Remember though, you are more than a template. You add value by walking your client through the process whilst maintaining your position as the commercial “go to” person. Your role is not to site there and regurgitate words for the tender pack, your role is to lead and advise.

Review your supply base and where there is limited competition set out a plan on how you will increase competition to get better offers. Where there is a monopoly review other options that might be available. Think, short, suppliersmedium and long term.

Aggregate demand across all business units and stop silo buying. It doesn’t matter if the individual needs are different. We want to focus on the supplier’s ability provide and not the needs of each directorate or business unit.

Roll out the good old 80:20 rule. Pull a spend report and check whether if 80% of your spend is concentrated with 20% of your top suppliers. If not start aggregating demand into larger contracts.

Be careful to not become over reliant on  a single supplier, balance the need for aggregation against supplier risk.

Are specifications asking for a rolls royce solution when a mini will do. Push back, your role is to be the gate keeper for all types of demand management.

Review your maverick spend, assuming that your have a PSL in place, make sure that people are buying from negotiated contracts.

It sounds obvious, but is everyone paying the same price? One example might be recruitment cost, different managers might be engaging with the same agency but negotiating different rates because there is no central contract in place.

Review performance in contract. You should be realising the benefits of your negotiated contract, but if its not managed, all the promises might not materialise. Don’t be afraid to ask for continuous improvements. It’s the suppliers job to come up with innovation and best practice they have learned from being in the industry and working with other clients.

Keep management informed. They should know if their contracts are taking them over budget. Provide them with monthly dashboard reports to increase spend visibility.

Make sure compliance is adhered to. Don’t overly rely on compliance but a governance procedure is there for a reason. Balance compliance such as NO PO no Payment with being commercial in your advice.

You are supposed to follow a robust procurement process but don’t hide behind a process. Use your judgement to allow for flexibility when business needs outweigh the “correct thing to do” where appropriate be agile and forward thinking. If you need to bend the rules do so, as long as you can justify your actions, create the best outcome for your clients because you want to offer them the best business partnering arrangement possible. Your role is not purely based on cost reduction. It’s not just about compliance, and you can’t walk around only interested in participating in commercial conversations. Your role is multifaceted and cost reduction is one aspect.