Where Have All The Savings Gone? Buyer Leakages As Sales Opportunities
Procurement is under pressure to continually cut costs. However a high level of leakage makes delivering fully on promised savings a challenge. That presents the seller with a number of opportunities.
Watch the following video (7 mins) to find out more, or keep reading below.
How successful are your customers at realizing savings within their business and most importantly in respect of your category of goods or services?
That is an important question for the seller because if savings are not being realized, that can send procurement in search of further supplier price cuts. Suppliers who can help buyers to reduce the leakage of savings can reduce the pressure on their margins.
Delivering Promised Savings Is Not Easy
Behind procurement’s image as the cost cutting supremo is the reality of a hard won fight to cut spend. Delivering promised or budgeted savings can be a real challenge.
Think of it as a leaky bucket. The bucket contains promised or targeted savings and it is being continuously topped up. The only problem is that the bucket of promised savings is leaking and leaking fast.
That puts pressure on procurement to keep adding more and more promised savings – to bring more areas of spend under control and to negotiate harder with suppliers for example. All the while a significant proportion of what is promised is spilling out onto the floor. Let’s examine how that happens.
Where Are The Leaks?
Let’s take the example of procurement being targeted with, or wanting to save 10% this year and more again next year. But how much of that figure can actually be delivered upon and by when?
Well let’s look at what happens to promised savings in many organizations. Let’s look at the holes in the bucket.
Leakage 1: Discredited Savings
The first source of leakage is a credibility gap. It is harsh reality that the savings touted by procurement are regularly discounted by finance (link). Perhaps the numbers just don’t stack up, or cannot be recorded in the company’s accounts.
From an accounting perspective procurement can find it difficult to take credit unless the saving can be linked back to an item of spending in last year’s accounts. So cost avoidance claims may be discredited.
Leakage 2: Poor Compliance
The next source of leakage occurs because people don’t, can’t or won’t follow the rules. This happens in the case of maverick spending, unplanned purchases and rush orders for example.
Managing what is spent is key, however it can be a challenge. Such ‘out of bounds’ purchases, or budget over-runs eat into the planned savings. Sometimes they can account for up to 30% of the procurement savings leakage in an organization.
Leakage 3: Unrealized Savings
Even if approved suppliers are used and procurement processes followed, the full savings, or other benefits are not guaranteed. They don’t automatically follow.
Savings go unrealized because of poor contract management, for example where terms agreed are not reviewed to ensure that full discounts or rebates are achieved. Or it may because of a failure to keep suppliers in check and poor supplier performance management.
It is not hard to imagine how the level of leakage here could be anywhere between 5 and 25%. The seller needs to help the buyer reclaim some of these unrealized benefits.
Leakage 4: Procurement Costs
The cost the goods and services bought is only part of the cost-savings picture. Some of the savings achieved will inevitably be consumed in administration and the other activities involved in sourcing, storing, tracking and paying for the goods.
With more procedures and paperwork involved in buying – the costs are rising. This is important because in some organizations procurement costs can account for more than 50% of the cost of the goods, or services purchased. For this reason the seller that can make it easier (or cheaper) to buy has an advantage.
Leakage 5: Supplier Proliferation
Many companies are leaking potential savings because of their sourcing strategy and in particular the proliferation of suppliers.
Every new supplier adds extra cost, so too does every new SKU (stock keeping unit). That includes the cost of supplier selection and management, inventory management, order and payment processing, etc.
But it is also includes the failure to leverage the best prices by placing larger orders with fewer suppliers.
Leakage 6: Unnecessary Complexity
Complexity drives cost. The opportunity for savings can be lost because what has to be purchases has been over-specified. For example where for example brand name products or components are specified by engineering or design. Maybe a cheaper, less feature rich version would do. For the seller, helping the buyer to revise specifications is important.
So, what are the leakages for your buyer? What is it that is putting pressure on his, or her numbers? Understanding the reality of buyer’s savings is important.
Buyer Leakages – An Opportunity For The Seller
If, as a seller, you can help the buyer to plug some of the leakages you can take some of the pressure of your own numbers and in particular your margins. That is because if the buyer’s savings are leaking away, there is more pressure to drive down your prices. With a leaky bucket you need to either put more into it (to compensate for the leaks) or stop it from leaking out in the first place.
Let’s look at how you can do that, taking each leak and exploring how the seller can address it.
1. The seller can help when it comes to savings that are being discredited or disbelieved within the organisation. To help the buyer get credit for savings the seller should:
•Know your buyers KPI’s
•Know the difference between Soft and Hard Savings
•Understand what savings can be claimed.
2. The seller can help when it comes to savings lost due to poor compliance the seller can help the help the buyer to better manage spend. In particular the seller can
•Help with spend analysis/tracking.
•Integrate with the buyer’s systems (i.e. e-Catalogue)
•Help the buyer win-over internal customers
3. The seller can help when it comes to savings that are unrealized, the seller can help the buyer to realize more planned savings.
In particular the seller can:
•Help with spend analysis and the tracking of
•Focus on communicating and realizing benefits / savings
•Engage in contract and performance reviews
4. The seller can also help the buyer to cut procurement costs. Specifically the seller can:
•Find ways to cut the buyer’s total cost of acquisition
•Promote electronic order submission, payment processing, etc.
•Help the buyer to reduce warehousing and shipping costs
Having too many suppliers is an important source of lost savings.
5. The seller can help the buyer consolidate suppliers. For example the seller can:
•Show the savings available by cutting suppliers and SKU’s
•Promote a framework agreements and larger longer term supply contracts
When it comes to the costs of overly complex or rigid specifications the seller can help here too.
6. The seller can help the revisit specifications:
•Highlight where cheaper alternatives exist within your product range and present the buyer with options
•Encourage the earlier involvement of procurement in the planning phase or projects, new product development, etc.
•Value re-engineering of projects and products –where specifications are rewritten to give procurement greater sourcing freedom
The motivation for implementing any of the above strategies is more than simple altruism. In addition to taking the pressure off margins, it can make the seller more important, more strategic to the buyer.