When to claim procurement savings.

Filed Under Blog | Comments Off on When to claim procurement savings.

Imagine the scenario your faced with a really complicated contract situation – annual spend is c$100,000 you’ve negotiated a 10% reduction on last years piece price cost and your pretty pleased with yourself, you think you’ve generated a pretty great saving.

But is it? You speak to the finance manager and he says “at this point you’ve saved nothing!”

Buyers and commodity managers work savings projects all the time but how do you calculate savings and when should they be reported – the key issue here is “you have to think like a finance manager.”

Consider the example above do you have a saving when.

• You’ve signed the contract
• When PO’s are sent out for the part
• At the end of the next financial year when you can compare spend on the commodity

Most businesses work by comparing financial spend from one year to the next and most organizations will not view anything as a saving, not simply following a contract negotiation, until it is recorded in their financial ledger

Consider, also how you calculate your cost saving. Your savings that have been negotiated will typically only be quotable in the first year (you won’t be able to claim the same saving for many years running.) this is because the revised costs will be baked in to the next years budget and if you achieve no further reductions the following years costs will be identical.

Also consider the scenario where consumption goes up and any saving is dwarfed by increased expenditure. Such situations can be commonplace when demand is variable or there are poor controls over purchasing. Is your saving still a saving?

Understanding when to “bank” savings can cause much concern for procurement staff. Calculating cost savings concerns many purchasing professionals with many being unfamiliar with the accounting rules. Within your own organization take the time to understand how the financial systems work – learn what your finance team consider a saving and develop a process whereby savings are officially ratified (many companies track officially recognized savings through a savings certificate which is reviewed by cross functional stakeholders.

Whatever the process, savings initiatives will always relevant in business. The key issue is having suitable processes behind it that are clear in what the business considers a saving to be and how it is realized.

Configuring the strategic sourcing process to work with complex commodities and services

Filed Under Blog | Comments Off on Configuring the strategic sourcing process to work with complex commodities and services

The strategic sourcing process is a common facilitator that configures an appropriate supplier network with business requirement. All procurement teams will use some element of the sourcing toolkit even if it’s just identifying suitable suppliers.

Strategic sourcing is often used a blunt, but effective, weapon in cost reduction programs and it can be very effective. However sourcing complex commodities or outsource providers for complex services can be difficult.

This is especially true of niche product, or where the requirement is subject to variability. Where innovation or a solution orientated approach is required the typical “expressive” or free text responses are difficult to avoid but are equally notoriously difficult to manage and review. In situations such as these the more traditional tools/forms or spreadsheets can be rendered obsolete and a new process is required.

When faced with these challenges it’s imperative that the sourcing team understand how they will both administer and evaluate the tender before you distribute any RFP’s (request for proposals.) A failure to understand what you are asking for or how you will interpret supplier responses will create confusion and delay. What is key is that you

1/ Are clear in how you will structure your requirement – if you are looking for innovation or a solution try and communicate what benefit you are looking for (e.g. reduced cost, service levels, reduced obsolescence etc).
2/ Understand how you will collect/receive proposals what format will they be in. You may be able to cannibalize your usual RFP template for some aspect of the tender which may make the review process easier.
2/ Determine how you will apply scenarios for example possible business strategies or demand variation
3/ Develop a systematic approach how you will review proposals
4/ Consider what cross-functional support you will need to review subjective content and to further down select suppliers (for example engineering/design or manufacturing input)

The key to complex commodities or services is that they require a close collaboration with a pre filtered supplier base. In these situations its unlikely that merely issuing a RFP will suffice. Cost reduction through innovation or solutions will only partially look at supplier margins whilst the overall proposal will deliver savings (perhaps even staged over the life of the contract). The best solution is likely to involve analyzing business requirement against the need for mutual gain (the suppliers profit and your cost/service level).

Next Page →