It’s not surprising that companies require their procurement staff to put most effort into analyzing big ticket purchases, like a new manufacturing plant or company-wide IT system.
They cost millions of dollars, pounds, euros, etc, and offer myriad ways to minimize costs without compromising on what employees value about the purchase, or preventing the supplier from making a reasonable profit. The requirement also means that procurement staff can’t simply avoid the difficult work of analyzing the “cost drivers” – the reasons why a supplier wants to charge a particular price for a purchase – of big ticket items because it’s so difficult.
But delving deeply into the most critical spending isn’t enough anymore. Procurement teams should also investigate drivers of cost in more depth across more “buys” (procurement language for purchases) so they can identify new ways to add value and improve credibility with stakeholders.
Start with What’s Easy
To help procurement staff move beyond analyzing the cost drivers of the most critical group of purchases, is to encourage them to work on those that are easiest to examine.
As well as taking into account the cost of a purchase and how critical it is to the smooth running of the company, it will help procurement teams to assess the level of difficulty involved in doing the cost driver analysis.
Procurement teams that do all of this help staff get better insight into what drives up costs – and so enable them to find additional savings – and ensure employees don’t burn out by giving them the easiest possible path to success.
How to Screen by Effort
Staff should consider four criteria to determine how much effort cost driver analysis would take for a particular buy:
- The amount of information available.
- Ease of access to that information.
- Familiarity that the procurement team or employee have with “category” (the industry, market, etc that the supplier operates in).
- The time available and the potential support, or lack of it, from business partners.
Procurement teams don’t need to make precise calculations about each of the four. Their best guesses are sufficient to help them reorder a list of purchases, and prioritize their work on those that are a combination of the most important to the company (high spend, critical to operations) and easiest to assess (see chart 1).
As one procurement director in CEB’s network of procurement professionals says, “Providing a formal and systematic way of seeing all their buys in one visual gives my staff better perspective on where they should be allocating their time to focus on the areas with the most value.”
CEB Procurement Leadership Council members can use a tool for doing this via their dedicated website. Staff enter the details of their buys and the tool will provide them with a list of which purchases they should spend their time on.
Chart 1: Using effort to prioritize which purchases to work on Source: CEB analysis
Making the Effort Screen Work in Your Firm
There are two ways to integrate this process into the procurement team’s workflow.
Category strategy input: As employees put together a strategy, they can refer to the list to determine which projects to pursue across their portfolios. This will help them target their efforts on buys that will yield the most value.
Evaluating new buys: When business partners request a new purchase, staff can go through this process to understand how much effort each purcahse will take. This ensures staff don’t miss out on opportunities that weren’t previously part of their plans.