Where can you deliver savings in the remnants of 2011? There are still cards in your hand, in this month’s SmartProcurement.
“There are four levers to pull in relation to cost savings,” says Larry Beard of Tate & Lyle, a global provider of ingredients and solutions to the food and beverage industries.
Look to a contract that is due to expire, at this point suppliers will be willing to negotiate and could offer great savings in a follow-up contract without being bullied. This avoids using time to go to the market or issuing a tender, says Beard.
Spending more this year with a supplier compared with last year? Armed with the figures, ask for better commercial terms or even a rebate. Speaking of which, remember to collect rebates. “Suppliers may, um, forget that they agreed to give you a rebate.”
Target areas of spend. “Have I got your best price on photocopy paper? I do? Well, I don’t need to include you when I go to market then” – you will quickly discover whether or not you have their best price.
Examine the specification of goods and services – do need what you’re paying for? Could your sales team manage with 300 minutes instead of 500 minutes? Separate organisational wants from needs, says Beard. Do you need your carpets vacuumed every day? Four times a week is a 20% saving.
Examine your end-to-end supply chain processes. Do you understand all the drivers of cost and cost elements? Can some cost drivers be removed or reduced?
“Collection vs. delivery is one area where procurement may be lazy. Investigate the transport cost before you adopt the delivered price,” notes Beard.
Challenge your suppliers. “How can reduce the cost by 10%?” Let them come up with ideas.
If the organisation uses a Procurement card, use it and push as much as you can through it, especially if it has a rebate attached to it. “Spend visibility is excellent with Procurement cards,” says Ian Russell, Head of Procurement at South African Breweries and SmartProcurement Editorial Board Member. However, without a clear and set of guidelines governing its use, a procurement card will fail.
“Restrict the shopping window,” says Beard. Rationalise the catalogues from which you buy, and introduce private labels into them, so called ‘no-name brands’.
Introduce a choke, where any order over a certain value is immediately challenged. It will force people to think twice about the volume they request.
If you use an inventory management system, analyse your level of safety stock. You may find some great savings through a planned and controlled reduction in safety stock.
Energy costs… Do you need that fluorescent light right above you monitor? It’s probably giving a glare anyway. Remove one bulb and start saving immediately.
Meanwhile, Russell says there are three effective levers to pull for quick savings this late in the year.
“Not spending is the best way to save, but it will make you unpopular,” he says.
Procurement should focus on discretionary / back office spend and must stay away from core, potentially revenue generating business lines – cut the fat not the muscle.
Also, it’s easy to identify patterns and opportunities in budget lines that go across all business units, such as consultancy, travel and stationery.
Russell advises creating extra sign-off routes / ERP workflow requirements for discretionary commodity groups, “so that Procurement can take a stronger challenge role”.
Practically, it’s too late in the year for big sourcing exercises, so focus on the supply base you already have. But, while the CFO may expect you to lean on suppliers harder, maintain integrity with the supply base: short-term actions must always be taken with a view to the longer term impact.
Identify substitution options for demand, such as using low-cost carriers instead of main airlines, or standardising print in black and white.
Also, work with suppliers to examine deferment options for spend into the next financial year.
“You will need to be aggressive, but fair. You will still need these suppliers next year.”
Leverage the tools at the disposal of Procurement, Finance and the suppliers to smooth the impact of costs in the current financial period, working within the International Financial Reporting Standards.
Look to capitalising key exchange /IT/Infrastructure projects, to lessen Opex impact of the activities, or discuss with suppliers the possibility of work / fees / maintenance agreements can be mitigated in this financial period and rolled over into the next.
At the end of the year, says Russell, the goal is to deliver some real, tangible savings to the bottom line, but with an internal customer base that has worked with you to deliver the changes and a supply base that has accommodated you, but which expects fair return.
You should end the year with an enhanced reputation owed “to the way you have executed [the exercise] with fairness, transparency and integrity,” concludes Russell.