Procurement Savings

A few years ago I was interim managing a procurement department in a medium sized organisation – the team had around 40 buyers (a mix of tactical and strategic buyers across a huge range of commodities).

The number one concern of the management team above me was – “What savings can the procurement team make”. Almost every day the drive was cost down.

All well and good and whilst some may argue that this isn’t modern thinking and is focusing just on the end result – it is a common theme in a great many organisations - it got me thinking about what a saving actually was.

You’d be surprised how complicated this got and how many meetings we had defining a saving. Let me shed some light on our discussions.

Finance – “A saving is only a saving if we see it on the bottom line” – i.e. my Pen cost $1 last year and 90 cents this year – that’s a 10 cent saving which I see in the bills I pay (it’s realised when it hits my P&L) – that’s all well and good I hear you cry but what if the people who manage the stationery now order extra goods with the difference – it’s still a saving yes but financially we’re in the same position as we were (albeit we have more inventory) as far as the bottom line is concerned where neutral (where we were) – no fiscal saving against budget.
What if my saving is on Future expenditure – one of our buyers did a fantastic deal with a major OEM with a significant reduction in cost across their range – great – the fact was it was unlikely that we’d procure that suppliers items in the next 12 months – so reduction in prices but no actual savings made.
Another buyer managed to reduce the acquisition cost of an item that ran into tens of thousands of dollars – fantastic – savings made – but wait a minute the contract with the customer that requires those goods is cost plus – oops – materials saving and margin reduction
A significant assembly in our manufacturing plant is failing – procurement pull out all the stops get the replacements in (pay extra for fast delivery and a premium for the supplier to divert the stock to us.) Extra money spent on Procurement and we’re above budget – but savings made when we look at the cost of non-supply – (outage in manufacture).
A particular range of equipment that we manufacture has a particular widget – we negotiate a new deal with the supplier of said widget and reduce the overall cost of production – problems arise however when we analyse the financial budget for the production and there was no detailed bill of materials (BOM) budget and therefore the financial forecast was a “finger in the air” – yes we made savings but against what – the original forecasted expenditure was flawed so we have nothing to baseline ourselves against and the difference in cost is lost in the accounts.

The moral of this tale is that when your looking to make procurement savings you need to

a) Define what a saving is/means to your organisation
Ensure everyone understand the rules of the game and what a saving is and when it is realised. Ensure that where people spend savings (as in the stationery example above) that adequate justification is given e.g. extra spend mitigate risk further down the line
b) Work against a defined (and costed) Bill of Materials – that way any savings (or increases) are easily identified.
b) Obtain sign off from the Project Manager and Finance when savings are made
Introduce a savings pro-forma where significant savings are identified and “signed off” by stakeholders – this then represents formal acceptance of your hard work.

Whilst there is so much more than “cost down” that Procurement can deliver – it’ll probably always be a significant part of Procurement activity so we hope you take heart in our cautionary tale and ensure that your hardwork is recognised.