Deliver Sustainable Profitability Through Effective Procurement

Goods and services purchased by a business can account for 70% of a company’s total expenditure, and we all want to reduce that cost. However, for many companies, work pressures and a lack of resources can lead to a focus on trying to save money on specific items, rather than reducing the business’s overall costs through effective procurement. Resultantly cost control can be lost, leading to a significant impact on bottom line profits as well as challenges on contract management and compliance.

Did know that up to 70% of a company’s revenue is owed to procurement? That’s why we believe that effective procurement (as opposed to just Purchasing) can help deliver sustainable improvement to your company’s profitability.

 

Here are five simple reasons effective procurement works:

  • Understanding the Requirement:
    Strong collaboration with other functions ensures you are buying what the business needs and establishes that they are aligned to what the business wants.
  • Identifying the Supply Base:
    It’s easy to stay with the same supplier year after year, but have you evaluated whether they are still right for your business? Spending time reviewing the market may lead to opportunities you had not considered – perhaps a client could also be a supplier?
  • Assessing supply opportunities and risks:
    Create transparency through a solid fact base for each category. Look at the total cost of ownership to ensure you measure all the costs rather than piece price alone. Low-cost country sourcing may have long lead-times, pro forma payments, and inexpensive delivery costs.
  • Conducting an effective commercial selection process:
    One size does not fit all! There are many ways in which to approach the market, so be careful to select the right commercial selection process, as well as applying demand management levers upfront.
  • Establishing commercial agreements to deliver sustainable benefits and reduce risk:
    Effective procurement is an ongoing process, not a silver bullet! By creating structured agreements, you enable sustainable benefits that monitor, measure and improve.

 

How do you measure the total cost of ownership?

Now, imagine that you want a phone with the iPhone 8’s capabilities. You might not see the point in investing more in an iPhone X, which is more expensive and has extra features that you don’t think you need.

However, regardless of what you need at the moment, think about your requirements in the long run. The improved longer-term usability may offset the iPhone X’s extra cost. It will run smoothly for longer, and you may find yourself finding value in and utilising the extra features.

It’s important that you spend time weighing up whether a more substantial initial investment will save money in the long term. Through considering the total cost of ownership, sensible decisions on where to invest become clear, and effective procurement becomes much easier to execute.

Place this example within the context of your business model. Distinguishing between want and need is essential. You can only work out which products are/aren’t worth additional investment by exchanging knowledge with your business and suppliers.

 

What you need instead of what you think you need:

  • Know your suppliers: Existing suppliers need to be checked, and new suppliers need to be vetted.
  • Supplier opportunity and risk: Identify where the risks lie with your supplier. Action things that minimise this risk and look for opportunities to improve your supplier relationship (effective communication is vital).
  • Be cost aware: If you negotiate the price of one iPhone 8 on the high street, you might get a reasonable price. However, you’re unlikely to get two hundred of them delivered to your business with flexible packages and usage. For the best price, you have to go to the market, explain that you want, including the services around it, i.e. delivery terms. You can find out about calculating total cost of ownership here.
  • It’s not all about getting the lowest specs possible: It’s about taking into account the risk, the specifications and the future requirement to get to the right balance of cost and capability.
  • Use the right commercial selection process: If you choose the wrong commercial process, you will get the wrong outcome. It’s the difference between selecting Amazon, eBay or running a traditional selection process of multiple rounds of bidding. The service you choose has to be tailored for the job at hand and the requirements of that job.
  • Close the loop: If you’ve done all of that and created a robust supplier-buyer agreement, you’re going to get what you intended to buy while protecting yourself from the supplier not delivering on what they promised in the agreement. You’ve got to close the loop so that everyone is legally clear on what’s been agreed. If you don’t put it on a signed contract, you’ve left it vulnerable to new challenges.

 

By distinguishing your businesses procurement requirements in light of how long-term usability subsides short term investments, you can cut costs and acquire things that will boost your business capital while minimising risk. Follow the steps to see measurable long-term improvements in procurement cost.

Richard Beaumont

At Bromley Wood we have considerable experience in helping businesses with their procurement, improving ROI, staff retention and the day-to-day running of your business.
If you would like to learn more and arrange a discussion, get in touch today.

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