Savings. Oh, glorious savings. As a strategic sourcing professional, your world likely revolves around savings. You work tirelessly to find them. Digging through spend, choosing negotiation strategy, setting up events, building eRFx’s, finding new sources of supply; it is all targeted on savings. And don’t forget what is likely the least pleasant part, reporting on savings and navigating the maze that is Finance in order to get them “recognized”. On top of that, there’s a good chance you are paid based on savings. Most large organizations base at least part of their incentive compensation for procurement teams on savings.
While risk management, supplier diversity, customer satisfaction and efficiency all matter, it’s savings that is perennially at the top of the list of goals for procurement teams. Given all the focus on savings, it’s hard to see them squandered. Too often, the savings you have worked so hard to find don’t make it all the way to your company’s bottom line.
Industry studies cite that up to 50% of identified savings are frequently lost prior to the bottom-line, it’s crucial that you, as the strategic sourcing group, do your part to plug the leaks. In the best case, it will bolster the perceived value of your efforts to the broader organization. At the very least, it will cut down on the internal debate about what exactly constitutes a EURO, Pound or Dollar saved. In the last several blog posts, we have spoken about Value and TCO. Not surprisingly, there is significant overlap between those topics and minimizing savings leakage.
Some of the best tactics we have seen at our customers include:
1. Get your assumptions straight – Be very careful of terminology especially when it comes to the adjective that precedes the word “savings” in your organization, including:
The first and most important step toward limiting the leakage in savings is speaking the same language. Each group is going to look at it a little differently. The same thing goes for savings tracking and measurement. Confirm the language that you are using ahead of time. It will make life a lot easier down the road.
2. Use Purchase Price Variance – We have mentioned it several times before but it’s worth repeating. One of the key benefits of your spend analysis system is Purchase Price Variance (PPV) which allows you to easily identify disconnects between what you thought you should pay and what you actually paid. It will also enable you to identify which suppliers with approved contracts are being used and where your efforts at supplier on boarding, enablement and adoption are falling short.
3. Get your suppliers’ help – Moving from antagonistic to collaborative buyer/supplier relationships has been a trend in the industry for a while. It may not be intuitive but it’s one of the best avenues you have to ensure that your hard-earned savings make it to where they belong. We have even heard increasing use of joint buyer/supplier savings targets so that buying organizations can take advantage of the suppliers’ likely superior category knowledge. Incentives for the supplier to sign on to a joint savings goal typically include expanded volume opportunities (e.g. new geographies, product lines or extended contract length).
4. P2P is your friend – The entire value proposition of P2P platforms rests on reducing rogue, off-contract spend. All of the cost and effort of a P2P implementation is done so that the contracts you have negotiated can be properly implemented and used. Much of the reporting on savings leakage will come from the P2P system. You should do everything in your power to ease the process of moving information from the contracts you have negotiated to the P2P system.
5. Finance and Spend Owners – The role of Finance is well-known and much discussed. Migrating the identified savings all the way through to budgets is a key step in stopping savings leakage. Also, remember that Finance’s numbers are the ones that usually “count” at the end of the day. For spend owners, demand management and supply adoption are the key levers. If you negotiate a 20% savings on a category and the spend owners end up buying 25% more, you net precisely zero. Similarly, the most-expertly crafted contract with a new supplier nets nothing if the spend owners stick with other suppliers. Not surprisingly, these people need to know who you are and be on your side.
If for no other reason, you want to prevent savings leakage to make sure that all the effort you put in to that perfect RFP, eAuction, negotiation and/or contract was worth it. Cooking the perfect dish is useless if there is nothing to share with anyone else.
For more information on these approaches or to learn more about how Scanmarket can help you achieve your business objectives, please visit us at www.scanmarket.com or contact your Scanmarket Account manager.
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