What is Procurement’s Role in Spend Control?
We work with many businesses who spend a lot of time working to reduce costs wherever they can – some with considerable success and some with far from perfect results! Focussing on Spend Control and gaining a handle on managing your budgets can be a daunting task but taking a few simple steps can lead to big benefits for your organisation.
Good procurement has a major role to play in Spend Control – it can significantly reduce the cost of the goods and services your organisation buys by finding suppliers who can deliver the best overall value. The focus here is not necessarily on price, although this has its role to play, but on such factors as total cost of ownership, quality, risk and innovation.
Here are our top tips for buying better and helping to get your spend under control:
Carry out a Spend Analysis
Do you know how much you spend with third-party suppliers? What are you spending this money on and with which suppliers? Most organisations spend between 50% and 80% of what they earn on buying in goods and services – a very significant sum and one that needs very careful management.
If you haven’t already done so, carry out a spend analysis by looking at the data in your purchase ledger, or if you have one, your purchase order management system. You’ll be surprised what you find. Typically 80% or more of your spend will go through 20% or fewer of your suppliers – this split depends on what your organisation does. And you may not even recognise at first glance some of the suppliers with whom you are spending quite large sums.
Categorise what you are buying – there are many different systems around to help you do this – so that you can see at a glance just what you are spending on raw materials, packaging, utilities, IT, marketing etc.
Identify your strategic suppliers and work with them closely to deliver the value you need
A handful strategic suppliers are likely to be the lifeblood of your organisation – they provide you with the goods and services which go into your product itself. Choose them carefully and consider entering into a longer-term contract which allows you the time for form a mutually beneficial relationship. Concentrate not just on price, but on improving quality, reducing overall costs, minimising risks and most importantly on capturing innovation – involving your suppliers fully in new product development or looking at ways to use their ideas to improve your products. Manage your supplier relationship closely – this is the key to success here.
Reduce prices by going out for quotation
A good number of suppliers form your core – you need them for your organisation to function but in themselves they are not mission critical. Here you are looking for good prices, and if you’ve been buying from the same supplier for more than 3 years without testing how competitive they are, then by searching out some competitors and asking them to quote you can typically save 20%. It’s best to set up something formal and ask three or more suppliers (including the one you use at the moment) to bid. Don’t forget to write down your requirements in enough detail to get an apples-to-apples comparison when the bids come in. But look out for different ways of doing things too – suppliers often have some great ideas.
Rationalise your suppliers – look at your tail spend
At the other end of the 80-20 split you will find many suppliers from whom you buy a wide range of goods and services, but with whom you spend very little. Look out for where you are using more than one supplier to provide you with the same goods and services – consolidate this spend into one supplier and economies of scale will give you lower prices. Weed out all those historical suppliers from whom you haven’t ordered in over a year – they just obscure your vision and clutter up your systems. And make sure that your staff know from whom to buy goods and services – where you have negotiated good terms and conditions – so that they won’t waste time and money buying in from yet another supplier.
Look out for efficiency savings
You can extend your spend analysis to look at the number of invoices you receive – you’ll be surprised at just how many there are and at how many of these are of very low value. Processing an invoice costs time and money and when an invoice is for a very small amount this is just a waste. Ask your suppliers to consolidate small amounts onto one invoice or use a purchasing card instead to pay some of your smaller bills – most banks have cards specially designed for business use.
We can help you to take these important steps. To find out more, contact us on firstname.lastname@example.org.