Why procurement Savings need the right fuel if they are to deliver business benefit
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Most companies embed the requirement to develop and deliver some form of savings strategy on their procurement teams. Most companies find that their direct purchasing (materials to make their product) is in the region of 40% of the businesses total cost base so an effective savings strategy can offer considerable benefits.
However whilst it’s perhaps one of the more commonly thought of tasks for many businesses these savings policies/strategies often fail to deliver to their full potential with many savings seemingly evaporating in front of the Financial Directors very eyes. Why is that? For many companies, there is an endemic failure to build the organizational processes and capabilities to sustain this cost savings activity.
Delivering cost savings is a process and like every process, it requires resources, tools and time to deliver. It doesn’t just happen on its own. Savings processes can be demanding as they often require cross-functional collaboration which in itself can be a game changer for many businesses. Consider for example the voice of the procurement team member offering a lower cost piece part to the product originally selected by the design engineer. Professional pride often kicks in with an ethos of “procurement don’t understand”. This can be a key barrier to overcome. On top of this procurement, savings are an ongoing process that requires sustaining over time – it isn’t a one-shot deal.
Procurement models invariably have a savings methodology which generally takes several steps from savings discovery to delivery. However, even with this established process, firms do need to invest in their procurement function, putting in place key talent and systems to drive the savings activity including ongoing reviews of spending patterns.
Large firms, especially those grown by acquisition, tend to find themselves with an extended and diverse supply chain team with a variety of skills and processes. Standardising teams and allowing them to collaborate on focusing on a shared strategy of category management and internal stakeholder management can help substantially. This is critical where businesses have a large distributed supplier base.
The key objective should be to deliver cross-functional initiatives which are supported (not run in isolation, by procurement. Often having a procurement team member on the project whos role it is to provide appropriate governance and support (embedding good savings ideology) is sufficient. The configuration of business teams can then allow companies to continue to deliver savings in a sustained way with everyone playing thier part.
A number of key capabilities are required to drive this forward.
1/ Organization structure – the business requires a clear decision-making process and structure with the right empowerment to deliver category management strategies that deliver full value. A cross-functional team structure rests at the heart of this.
2/ Personnel – Delivering savings requires the appropriate skill set. This is not simply making someone responsible for savings but providing the right skill set within the teams that can deliver it. People that are knowledgeable about the process and have the skills and experience to deliver it.
3/ Tools – without the appropriate spend management tools and data any savings team will fail to deliver its potential.
4/ Management buy-in – Management teams need to recognize that procurement savings are a sustained ongoing process requiring the right ‘fuel’ and governance. The most significant issue that many businesses face is how to bring the procurement function into strategic decision making. The leadership team needs to tune itself into the ongoing process in order to deliver a savings strategy that sticks rather than makes one-off promises that it then fails to deliver.
By evolving the role of procurement from tactical to strategic can help companies lower their cost base substantially. The right procurement team armed with the appropriate tools and training then rest at the heart of how the company does business.
How does your company manage it’s procurement savings? We’d love to hear your thoughts on the process in the comments section below.