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Time to Stop the Business Running Up Costs

Procurement teams have well honed techniques for negotiating with suppliers and minimizing costs, but it's far harder to manage colleagues' own dealings with vendors

The job of a procurement professional is to not just to save their company money but to make sure that what is spent helps the business accomplish its goals. And like any other corporate function, procurement staff often want to work on the biggest, most high-profile projects – a professional services contract to manage a huge company-changing acquisition, for example.

But, as with so much in large multinationals where the management and coordination of innumerable fine details is core to the firm’s success, procurement teams can be of much greater help by working on smaller, less costly purchases that they often refer to as “lower-” or “middle-tier buys.”

Not only are far more of these being made throughout the firm, but the line managers and other business partners making these purchases will often see them as equally important as any big ticket purchase. Stepping in and helping these managers will also greatly boost Procurement’s profile which is important as, at many firms, the function’s reputation is taking a hit for its lack of support for less critical purchases (see chart 2 in this post).

Sweating the Small(er) Stuff

But working out why suppliers are charging what they are, and whether it’s worth it – what procurement teams call analysis of the “cost drivers” – is often more difficult for these lower- or middle-tier buys than for the bigger versions. Procurement staff may feel they have more questions than answers, in contrast to the support and information that’s available for top-tier buys.

One important set of cost drivers comes from business partners unintentionally running up costs by doing things like making late payments, managing contracts badly, or failing to plan for when they will need the services of a particular supplier.

Many procurement professionals in CEB’s networks say that these internal causes of high costs are often overlooked. As with external costs, procurement staff can find it challenging to understand some of those drivers and their effects on the business. There are also two additional difficulties when it comes to anlayzing internal drivers.

  1. It can be harder to get information from inside the company than from suppliers: For instance, while procurement teams may be able to discern their company didn’t get the expected value from a contract, isolating the exact point at which its worth fell — as well as who was responsible — can be complicated.

    Or they may be able to tell that the company spent more than expected on a consulting arrangement, but it’s probably harder to determine why, and whether it was worth doing.

  2. Tackling internal cost drivers usually means a difficult conversation with business partners: Procurement staff often understandably want to avoid the unpleasant task of confronting business partners about why they spent more than they anticipated.

    It’s crucial to control this variable. Procurement needs its employees to investigate drivers of cost in more depth across more buys so the function can identify new ways to be useful to their colleagues and improve Procurement’s credibility.

Lessons from a Travel Company: Helping Staff Manage Internal Cost Drivers

The procurement team at a travel company in CEB’s networks provides some good inspiration here. They helped staff manage internal cost drivers by concentrating on a limited set of factors. The process they developed gave them better visibility into those drivers, and also armed the team with information that helped with subsequent discussions with line partners.

To start with, the procurement team identified the drivers that were pushing up costs the most. The chief procurement officer (CPO) recognized that if he asked staff to investigate all possible cost drivers, they probably wouldn’t be able to make significant progress on any of them.  Restricting staff to just the top five let his team concentrate on the factors that were causing the most waste. The team followed four steps to do this (see chart 1).

Then, procurement managers asked staff to determine what percentage these most important drivers were out of the whole total. Rather than require employees to pinpoint precise numbers, the CPO told staff to make estimates. His goal was to help them size up the problem so they would have a sense of what matters most and could quickly move on to taking action.


Chart 1: Four steps to finding the most important internal cost drivers  Source: CEB analysis


Cutting Costs

After that, the procurement managers asked staff simple questions about the drivers to help them find the best way to cut down these costs:

  • How does this driver influence the sourcing activity?
  • What levers can we pull to manage these drivers?

Since procurement employees often don’t know where to start when it comes to investigating cost drivers, these two easy-to-understand questions helped them brainstorm ideas based on their preexisting knowledge. The template in chart 2 can help as well.


Chart 2: Internal cost driver assessment template  Source: CEB analysis


 

More On…

  • Uncover Cost Drivers

    Download these techniques for identifying and addressing the true drivers of cost.

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