Procurement professionals who traditionally measure their effectiveness by means of savings will sooner or later face the following problems: a depletion of supplier resources and a loss in supplier motivation in terms of further co-operation. Suppliers cannot always be the sole source of benefits, patching holes in your company’s balance sheet with their funding, says Sergey Dovgalenko (FCIPS), Head of Procurement, Etihad Airways.
Perhaps that is why the concept of strategic sourcing appeared, emphasising an early analysis of requirements so that you can conduct negotiations with internal customers about excessive volumes, pumped-up specifications and overstated expectations.
However, these types of negotiations are much more time-consuming and nerve-wracking than those with suppliers – here the opponent is usually a heavyweight and charismatic, and they can ‘blackmail’ buyers with operational disruptions, loss of revenue or damage to the brand. Procurement thus needs to persuade and manoeuvre using economics, psychology and internal politics as tools at their disposal.
But let’s assume that the opportunities for strategic sourcing in your company have been explored and are effectively utilised. What else can buyers offer their companies in terms of adding value?
Procurement frontrunners will undoubtedly participate in product development, conduct deep supply chain analyses, and audit or optimise business models and strategic suppliers’ production processes. (To know just how far the horizon of procurement excellence really stretches read Disruptive procurement: re-inventing and transforming procurement function by AT Kearney’s team of authors.)
However, there are some reasonably simple solutions that you can use to start adding value today:
1. Effective use of savings
Where are the millions in annually claimed procurement savings? Usually, nowhere.
Accounting and the classification of savings may be incorrect and savings in future periods are mixed with the results of the current fiscal year. The value of savings can be calculated from a supplier’s first offer. Monitoring actual consumption vs. the RFx forecast may be absent. Finally, savings might get spent on unplanned needs as the available budget needs to be utilised fully.
Here are some basic principles of savings management that you can introduce:
• Savings should be measured against a budget
• There should be a distinct ‘bucket of savings’ applicable to the current fiscal year (i.e. ‘cash’ savings)
• Reporting must be approved by financial control
• Benefit realisation should be monitored on the basis of actual consumption (not forecasts)
• Approved savings for the current fiscal year must be deducted from the specific business unit’s budget
By adhering to the above, real change will reflect on the financial performance of a company and, in turn, procurement efforts become tangible.
2. Supplier innovation
Supplier relationships provide a unique resource: supplier knowledge, experience and creativity and it should be used to the benefit of your company. For example:
• Recommendations on quality improvement and cost reduction in the supply chain and product lifecycle
• Synchronisation of roadmaps between the supplier and your company, so that supplier innovations immediately contribute to your product
• Business consulting, which most suppliers are ready to provide free-of-charge or at a minimum rate, will enable your company to optimise its business model, production process, marketing strategy, etc.
After all, suppliers, like no other, are interested in your success.
3. New streams of revenue
Your supplier base is a bonus pool of potential customers. Most likely, they consume something similar to what your company produces, and, perhaps, are served by your competitors. Of course, attaching suppliers to your products will not be easy, especially if your competitors are also their customers. However, to get at least a portion of your suppliers’ budget is quite realistic. Supplier commitment to purchasing your company’s product should become a standard element in your negotiation strategy. In general, the mentality of buyers should be constantly tuned to not only cutting costs, but also to generating new streams of revenue.
Ways in which costs can be transformed into revenue are specific to a company, market, industry, etc. A few practical examples from the aviation industry includes:
• Outsourcing the in-flight magazine to substitute production costs with sharing advertising revenue.
• Re-negotiating an agreement with a travel agency to achieve revenue share from visas issued online to passengers. Previously, all revenue remained with the travel agency.
• A variety of trade-in programmes with computer and mobile terminal manufacturers.
• Selling re-usable or recyclable packaging; returning accessories and certain consumables in exchange for a credit note.
• A yard sale of retired onboard products (dishes, cutlery, linen, blankets, etc.) to suppliers and staff.
• An open auction on corporate vehicles that have reached their maximum mileage.
4. Off-loading the balance sheet
Obsolete and faulty equipment, marketing materials that have not been allocated, stands from past exhibitions, materials with old branding – all of these are ‘dead weight’ and worth millions on the balance sheet of a company. Identifying these, sorting them based on usability, determining their book value, and then preparing them for sale or disposal is an incredibly complicated process that few people want to deal with.
Procurement and supply chain management would typically elect to off-load a company’s balance sheet, optimise warehouse space and associated costs, and obtain additional revenue via the sale of potentially useful assets. The financial benefit of this process thus sometimes exceeds traditional procurement savings.
You can barter any product or service produced or consumed by your company to eliminate sales, distribution or marketing overheads, and, most importantly, to save cash. You can grow your client base, sell-off dead stock or reduce bad debt. You can also employ specialist companies offering airline tickets, hotel rooms, advertising assets, etc. in exchange for barter currency. Bartering tools can thus be used to attract new revenue as well as to off-load the balance sheet.
6. Marketing co-operation
Any large company has significant marketing assets, for example, a website, social networks, regional offices or points of sale, even a fleet of vehicles. The key component here is the clientele that has been thoroughly studied and classified. Marketing assets can be offered to suppliers for advertising, brand promotion and targeted campaigns in exchange for revenue, discounts or similar assets to promote your own brand.
For example, having a large fleet, a company can conclude an agreement with an automaker to lease vehicles of its brand for a significant discount, as they will be part of the marketing programme. In the aviation industry, manufacturers are willing to pay airlines for the opportunity to serve their products (beverages, snacks and cosmetics) or branded napkins and cups to passengers. You can co-brand a small outsourced warehouse or sell the name of a metro station, stadium or aircraft – the possibilities of marketing co-operation are truly without limit.
7. Preferential buying
All over the world, there are programmes to support small private entrepreneurs, war veterans, local crafts, etc. This is a social obligation not only of the state, but also of large companies. You can factor preferences into tender evaluation, for example, by allocating 10% – 20% of the commercial rating to it. Thus, your company will realise its social responsibility while at the same time improving its public image.
Suppliers who are customers or marketing partners of your company, and who generate significant revenue, can also receive certain preferences. Certainly, your long-term strategic partners should enjoy some recognition in regular tenders – the main point here is that it is not based on a subjective assessment of an internal requestor, but clearly reflected in the tender evaluation.
8. Additional staff motivation
Procurement can provide additional tools to motivate staff. For example, corporate travel discounts on airline tickets and hotels can be extended to the private travel of company personnel and their families. Your suppliers can provide offers to your staff or even set up a temporary point of sale in your office.
In some companies, there are sections on the corporate website that contain special offers from suppliers and issue discount cards. A staff discount programme could be specified in employment contracts as one of the benefits offered to employees.
The above examples are meant to demonstrate that procurement can add value beyond traditional price negotiations. Revenue can be increased, the image of the company improved, relationships with suppliers strengthened and the brand promoted – all thanks to the comprehensive professionalism of buyers.
You can get in touch with Sergey Dovgalenko on LinkedIn.