No business should spend more than it has to. In fact, doing so would not only be a big bottom-line blow, but in times of economic stress even threaten its very existence. And yet, many companies are failing to squeeze the most from their budgets by not treating across-the-board spend management as a strategic objective.
Of course, imperfect knowledge of all possible suppliers, and an inability to switch between them at will, means no budget can ever be optimal.
However, when external purchasing makes up an average of 43% of total company costs, instituting more effective spending programs can have a major, positive impact.
According to management consultancy, Bain, organizations that excel at procurement are able to lower their purchasing cost base by between 8% and 12% and then enjoy a further 2% to 3% in additional annual savings.
In its report, ‘Unearthing the Hidden Treasure of Procurement’, Bain highlights the case of one agricultural chemicals company that cut $130 million from an annual indirect expenditure of $1.5 billion just by revisiting the service contracts it had in place with vendors.
These are some of the potential savings that, Bain says, are achievable across different commercial cost centers:
- Direct Materials – 2-10%
- Financial Services – 5-10%
- Office Equipment and Services – 7-13%
- Marketing – 7-13%
- Professional Services – 7-14%
- IT & Technology – 10-15%
Using a company like Amazon as an example, it spend approximately $2.8 billion on digital marketing in 2015. 13% savings on this digital marketing spend would equate to $336 million: certainly not small change, even for the biggest e-commerce business on the planet.
It’s also important to note that an overwhelming majority of the spend areas Bain highlights (above) are indirect categories: corporate expenditure that has, historically, largely been left to its own devices, and never really viewed as a viable source of savings.
How is it possible for procurement to drive such savings?
10 Steps to Savings
Bain highlights no fewer than 11 suggestions on how procurement savings can be achieved. We’ve also included a bonus eleventh step, which outlines how savings of up to 30% can be achieved on indirect services spend.
1) Collaborative Procurement
Make procurement a ‘whole organization’ activity. Many companies compartmentalize it too much so it never becomes part of the corporate mindset, as it does in those where it’s something embraced by all departments.
Empower your procurement team. They have the ability to collect, analyze and assess data in ways that can beneficially influence buying decisions and drive savings.
3) Revisit Supplier Contracts
Negotiate better terms with suppliers. This isn’t always easy to do if the products and services bought are bespoke and highly customized. However, benchmarking costs, fees and margins against industry standards can help strengthen your arm when renegotiating contracts with incumbent suppliers, and agreeing terms with new ones.
4) Benchmark Spending
Similarly, compare your spending against competitors. If business units see they are spending less efficiently than others in the market, they should be encouraged to share that information with the procurement team. Procurement should also be actively engaged in benchmarking both direct and indirect expenditure.
5) Supplier Consolidation
Spreading purchasing too thinly between many means management efficiencies and economies of scale in pricing are missed. One company Bain identifies saved $10 million by cutting the number of maintenance and repair equipment suppliers from 2,000 to effectively just one.
6) Spend Optimization
Think not just about what you are paying, but also about what you are buying. Is it needed? Is it the right thing? Can something else do the same job at lower cost? Such questions are at the core of spend optimization and by asking them procurement teams can identify unnecessary expenditure.
7) Look at ‘Whole-Life’ Costs
That may mean paying more upfront, which is a big ‘no-no’ on the face of it. But it can be economically the best choice if there are significant savings to be had longer-term.
8) Map Savings
Map savings to budgets. If you don’t want savings made in one area to be immediately consumed by another, then they must be tied to annual budgets.
9) Supply Chain Analysis
Examine and analyze your supply chain regularly. That way you come to understand whether it is better to produce in-house or buy from an external source.
10) Innovative Sourcing & Delivery
Finally, innovative online sourcing and delivery platforms present significant cost saving opportunities.
Using blur’s Marketplace, not only are you able to connect with a global pool of over 65,000 pre-vetted suppliers, but you can also achieve savings of up to 30% in indirect categories like marketing, IT and professional services: three categories highlighted by Bain as having the highest potential for driving savings.
Contact a Procurement Solutions Consultant today to learn more about how blur’s Marketplace and Indirect Spend Management platform can help you drive significant savings on indirect services spend.