The Cost-Saver Menu: 11 Ways To Help Your Buyer Save
Imagine if you could give the buyer a menu of ways to save money, other than cutting your margins. This insight shows you how.
Procurement has been called the king of spend. That is ironic because everybody knows it’s job is to save rather than to spend. What is less well understood is the full menu of options for making savings. This is essential for any salesperson entering into negotiation on price.
Procurement ain’t no one trick pony!
Many people see procurement as a one trick pony when it comes to how it cuts spending. Beyond the hard-balling of suppliers there is little understanding of all the other ways it can cut costs. That matters because it means sellers are deprived of a range of creative strategies to deflect those buyers who can’t see beyond cutting supplier margins.
How many cost saving alternatives can you list for the buyer?
Obviously driving down supplier prices is the first port of call for the buyer. So it features at the top of the cost saver menu. However the menu offers what we call a number of vegetarian options – ones don’t require supplier blood letting!
Can you show that non-price variables really matter?
There is only so much supplier fat that can be removed before the supplier begins to lose interest. Also cutting price could cost more in the long run, where the total cost of ownership is overlooked. With that in mind let’s look at the menu of options for cutting costs – what we call the ‘cost saver menu’.
An a la cart menu for cost-cutting
The cost saver menu offers a lot of choice – more than 10 options. It is an a la cart menu presenting buyers with options to suit every category of products and services bought. The more of these options that the seller can encompass in his/her proposal the more effectively pressure on price and margins can be distributed. The menu options are complementary and can be used in tandem.
Reduce what is being bought by tackling unnecessary orders and waste. Also known as demand management it begins with an analysis of spend, setting a budget that cannot be exceeded and putting an order approvals process in place. Of particular importance is to facilitate increased visibility and tracking of spend.
Bundling all the orders organization and category-wide – also called aggregation. This enables the leveraging of volume for a better deal, including bulk orders, longer term supply contracts and framework agreements.
Reducing the variety of suppliers and products being bought – also known as consolidation. This reduces complexity and the costs associated with all aspects of procurement, including supplier management and inventory levels.
There are two sides to the purchase – the costs and the benefits. The two must be managed in tandem. It makes no sense for organizations to spend many months in planning the right strategies, finding the optimum solutions and choosing the best suppliers, simply to leave the most important element to chance – that is the realization of benefits. That means driving maximum value from projects and purchases, or getting more for what is being spent.
Benefits – just like anything else – must be planned, tracked and managed. Buyers must close the loop in terms of reviewing purchases, projects and suppliers to ensure that benefits are verified, maximized, communicated and sustained. While the benefits plan is normally the buyer’s concern, it is also a powerful tool for the seller. It is a new way for the seller to tell the buyer that‘we are obsessed with your benefits too‘.
Can lower spec items be used in certain circumstances, can some branded items be replaced with generic alternatives. It may require going back to the design of the project, or product to strip out cost and change the specification in a way that presents greater sourcing freedom to procurement.
The cost of procurement can be a significant element of the total cost of a product, or service. This leads to efforts to cut procurement administration through the use of more efficient processes (e.g. framework agreements) and systems (e.g. e-Ordering, e-Invoicing, etc.). For example a supplier that can provide end users with access to an online catalogue to procure approved product items can help the procurement team reduce its administrative burden.
An obvious, but sometimes overlooked way to cut costs is to tackle ‘unapproved purchases’. A key opportunity is to prevent maverick purchases, in particular purchases from unapproved vendors, or of unapproved items. In tandem with this managing cost requires increase coverage – bringing more areas of spend within procurement reach. Ultimately, the implementation of category-led approach is required, where all related goods and purchases are planned for and managed more strategically.
An area that can easily be neglected is contract management and that costs organizations money. Buyers must review supplier contracts regularly to ensure that all supplier discounts, deals and promises are fully exploited. Reconciling the purchase order or contract with what has been received can produce surprising results.
Clearly outsourcing is a key strategy in the drive to reduce costs in procurement, as well as other areas. In areas ranging from facilities management to computer services there is a drive to:
- Replace fixed overheads and CapEX with managed services and OpEx.
- Integrate a diversity of suppliers, into an integrated supply chain
There may be opportunities for your customer to outsource more parts of the procure to pay lifecycle, as well as less strategic parts of the overall business model. This might take the form of buying in finished product, as opposed to components that need to be assembled, or the shipping of finished product direct from the supply chain partner to the end user, rather than to the buying organizations warehouse.
Inventory and warehousing related costs can be a significant part of the total cost of ownership in respect of many physical purchased items. The question is: How the level of cash tied up in inventory can be reduced, while maintaining a sufficient buffer stock? Options include; improved S&OP (sales and operations) planning between customer and supplier, vendor managed inventories (reduces warehouse inventory and other costs), central distribution centers (CDCs) and postponement (i.e. delaying finishing product touches, e.g. colors and feature sets, that increase the level of stocks required).
For many companies innovation provides the greatest promise of sustainable long term cost reduction and efficiency gains of any strategy. For many this realization has led to close collaboration with suppliers to find innovative ways to cut cost and eliminate waste through product or process innovation. Such innovation can produce real win-win – ways to cut out cost without hurting supplier margins.
There are certain suppliers that have the potential to impact on the buying organizations success. It makes sense to invest in performance management and development – to help these strategic suppliers to boost their performance, by helping them to develop their processes and skills.
Why procurement needs more than a knife
Procurement is required to delver upon the bottom line, but it can’t just be about cutting supplier margins. That is just one of a number of strategies. The menu has 11 items as noted above.
How many of the 11 items are included in your sales approach?
Many would argue that slashing supplier prices and margins is not a sustainable strategy for delivering year on year savings. This is particularly the case for strategic goods and services. That is why we say that ‘procurement needs more than a knife’.
If the item in question is a commodity and the balance of power rests with the buyer, there is likely to be considerable scope for beating the supplier up on price. However if it is not a commodity and non-price related variables are important, a point will be reached where cutting the seller’s margin becomes counter-productive.
Regardless, the seller must take the pressure off price by helping the buyer to identify meaningful savings in a host of other ways. Before the buyer goes straight for the red blooded steak, the seller must make sure he, or she has seen the other tasty delights on the menu.
Looking Beyond Cost
Procurement wins friends because it can deliver additional profit to the bottom line, but that is not enough. To satisfy investors procurement has to go one step further. It has to increase business profitability as measured in terms of the return on investment, or ROCE.
Being able to generate an extra 5, 10 or 15 million in profits is an impressive achievement, particularly in an era of low market growth. But imagine being able to free up an extra 30 million in working capital by reducing the amount of money tied up in inventories (including work in progress and raw materials) and other areas. It is about business performance and efficiency ‘in the round’. This is another reason why the full menu of cost saving options is an important tool for both buyer and seller.