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The pressure to reduce costs puts tremendous stress on procurement officers. But procurement isn’t simply about getting more for less. Consider these six points to improve your purchasing team’s competitiveness.
As chief purchasing officers (CPOs) address current and potential suppliers, analyze their performance and rank their attractiveness for critical company needs, it is worth considering the points below. These cost-cutting methods help firms to compete in today’s increasingly complex global economy.
Partner Relationships
Purchasers are constantly in search of the ideal buyer/supplier relationship because “when collaboration is done right, it addresses one of the biggest challenges companies have today — not having very much visibility beyond their Tier One supply base,” Sanjay Argawal of Deloitte Consulting recently told IndustryWeek. “When you form a strategic partnership with your supplier, you also get visibility into the supply chain beyond that supplier. And the more visibility you have in the supply chain, the more influence and control you’re able to have to prepare for supply disruptions.”
Once you have a good relationship, the job is only beginning. Continuing “a mutually beneficial relationship [requires] an understanding of each others’ business needs,” according to another Industry Week report.
Service Levels and Cooperation
To ensure your comparison of prospective suppliers is fair and won’t lead to extra costs, purchasers should form a list of questions before researching a potential supplier. Sometimes suppliers fail to inform buyers about certain charges that the buyer must separately incur, such as the cost of goods transportation.
Other examples of nondisclosure include packaging, service calls, training, associated supplies, and financing costs if any. To avoid unexpected fees, “everything must be negotiated and checked,” says the American Purchasing Society.
“Don’t wait until you are forced to close a deal quickly because the material is needed immediately,” the American-Purchasing.com recommends. “Plan ahead by making a list of questions and topics you want to cover.”
Flexibility and Responsiveness
When local buyers are flexible, they can work with buyers at headquarters to achieve greater savings.
It may be tempting for local buyers to thwart collaborating closely with buyers at headquarters because local buyers want to please the local managers. However, transparent and holistic analysis of costs and benefits will serve a company best. (In Creating Corporate Advantage through Purchasing, the Institute for Supply Management describes different ways that local and headquarters buyers may interact.)
To improve responsiveness, watch for a lack of it. Poor responsiveness becomes apparent with the old-school attitude of strategic procurement. Supply Chain Management Review outlines this as follows:
- Slowing down the process;
- Too bureaucratic;
- Ineffective (“We can get better deals.”); and
- An unnecessary change (“We’ve done it this way for years.”).
Buying Into Sustainability
Green or sustainable purchasing for manufacturers may seem to many like an added burden, but it’s possible to adhere to this increasingly expected standard (via regulations and consumer requirement) to save money, boost resource utilization and improve sustainability.
One provider of materials solutions recently suggested in a report from the Aberdeen Group these five keys to starting a sustainable procurement program:
- Attach a dollar sign to every initiative to let people know about the savings involved;
- Calculate and communicate the lower procurement costs as well as the avoided disposal costs;
- Communicate with suppliers to get insights into where opportunities exist to cut costs;
- Track savings for the firm and its suppliers; and
- Deeply analyze the entire product lifecycle and associated supply chain.
“The idea of a green supply chain isn’t exclusively about green issues,” Darin Yug, co-author of a report from Diamond Management & Technology Consultants, Inc. last month, said in a statement. “It’s also about generating efficiencies and cost containment.”
Optimizing Technology
Technology-enabled procurement is no longer about whether it helps companies perform better of not. Rather, “the debate is over technology deployment options remains unresolved in the procurement realm as the split between those that prefer installed (41%) versus on-demand (37%) remains close,” Aberdeen reports.
When the research firm analyzed 350 survey respondent’s performance, it found these differences between best-in-class and laggards:
- For e-sourcing, 53% of the best-in-class group uses it, while only 28% of the laggards do so;
- For e-procurement, 70% of the best-in-class companies rely on it, while only 40% of laggards have it; and
- For e-payables, 41% of the best-in-class firms use it, but only 31% of laggards work with it.
Looking Inward
“The price of non-conforming materials can run 7% to 15% the cost to manufacture (25% in capital equipment),” according to the Association for Manufacturing Excellence.
Yet rather than scouring the earth for ultralow-cost suppliers, the best place to begin achieving cost efficiency is right in your own business.
“Money is hidden in inventories, time and inappropriate quality throughout the process,” the Association for Manufacturing Excellence notes.
Many companies are in the process of or have completed, shifting to a center-led structure as a way of maximizing spending, standardizing processes, and driving efficiencies. “This organizational structure blends centralized policies and processes and a focus on spend aggregation with decentralized decision-making in ‘the field’ of operations,” Aberdeen says.
This transition is not always easy. Company-wide alignment and standardization of procurement procedures and systems remain top challenges. Nor is complete centralization always practical or even desirable, as is the case in complex, distributed enterprises. “Despite the prevalence of center-led and centralized procurement operations, misaligned processes and systems remain the top barrier to success,” Aberdeen says.
Yet while considering these six points discussed can serve as a platform from which to make procurement a strong contributor to profits and growth, not any one of them alone is a silver bullet.
“The proper blend of talented people, efficient processes, and enabling technology is needed to achieve a broad procurement transformation,” Aberdeen concluded.
Image Credit: Yeexin Richelle / Shutterstock
