This is the first article in a two-part series.
What else should the procurement and supply professional consider?
In this article, I intend to look past the dollar savings on product unit prices for procurement savings opportunities. I do, however, intend to look at reduction in spend with minimum risk as well as to tirelessly look for further savings.
I and others have written about this on many occasions. It is a topic that will always remain relevant, though, and if we ignore it, it is at our own peril. Spend reduction opportunities are something we always need to have on the agenda, and we should assess each opportunity as it arises.
When I talk about spend reduction opportunities, I do not mean continually forcing your supplier’s back against the wall. While this strategy could arguably have merit on some occasions, it is meaningless if a supplier’s ability to provide the expected service levels is compromised. I also do not propose cutting areas of spend like maintenance or production input costs, without first performing a sound investigation and risk assessment.
All savings initiatives must be on the table.
However, I do consider all initiatives and all stakeholders and along with all supply partners. There should be no “sacred cow.” In other words, every savings opportunity should be considered, and none should be off limits.
A balanced view of savings - as opposed to “slash and burn” - is going to result in the identification of meaningful opportunities. To be sure, the law of diminishing returns will reduce benefit thresholds progressively over time. Therefore, individual product unit prices should be heading in the direction of “best possible price.” Committed relationships (meaning shared goals and objectives) with our suppliers and internal stakeholders will help us achieve the best collective outcome.
Then what comes next? The savings hyperbola will always approach the horizontal or vertical axis but never arrives. This means there will always be savings opportunities to be had, notwithstanding the diminishing return.
Spend management is not a one-time deal.
As businesses face a squeeze on margins and market shares, ongoing efforts must be made to get “more bang for their buck.” Even market leaders need to remain relevant, and this can only be done when innovation is high on the agenda and all things are considered relevant in terms of spend management. If this not the case, then any advantage the market leader may have could quickly disappear.
That being said, innovation is not the focus of this article; spend management is. Let’s look at telecommunications and air travel; both the cost of calls and the cost of air travel have decreased markedly over the years. Of course, I use these examples with caution since this is only a small part of a much bigger picture to consider for both industries in terms of cost and spend management.
The point is that airlines and telecommunications companies have had to look at more attractive pricing for their customers or face losing them to competitors. Cost cutting and spend management would no doubt make a real impact. Businesses should be constantly re-evaluating their cost-cutting and spend management strategies, while making sure that they are also sustainable and low risk (I do not believe there is such a thing as no risk).
What categories should organizations examine?
Besides this, companies should ask themselves if there are new areas to consider or old areas to re-consider. They should think about packaging, logistics, and rationalization/standardization opportunities. An increase in business process efficiency is also an area for improvement.
Paying less for something ought not to be viewed as exclusive as far as savings realizations are concerned. Making an informed decision more quickly allows for improved reaction times – something that is important in a competitive market where leaders wants to remain leaders.
In Part 2, I will take a closer look at these categories as areas for cutting costs and managing spend.