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Taking cost out gets executives and procurement professionals excited. Procurement literature includes numerous methodologies for saving money, but the question procurement professionals should be asking themselves is this: which cost savings are short-term focused and which are sustainable? Sending suppliers the infamous procurement “10% off our invoice or else” letter – in other words, simply attacking the supplier’s profit margin – is a reality that the current economic situation has forced on many organisations. Although these methods may deliver quick savings and may prevent organisations from serious financial problems in the short term, these often have a one-off effect, send the wrong messages to suppliers, and may hurt your organisation in the long term. More than anything, these practices focus on remedies that sit outside the boundaries of your organisation. Although we do not universally condemn such techniques (there are, after all, both sensitive and aggressive ways of seeking the same result), we would recommend that organisations initially start looking internally to reduce spend. Such approaches include reducing internal demand; recommending alternative products or services; challenging specifications / requirements; exploring make versus buy options; focusing on the total cost of ownership (TCO), rather than pricing alone; and streamlining internal processes. Additionally, organisations should stay close to their most important suppliers and embark on joint initiatives to spur cost savings, re-engineer processes and deliver innovation. During the past two years, nine out of 10 respondents (91.8%) have tried to secure savings by negotiating with their existing suppliers on price, followed by identifying and working with new suppliers (82.7%) and implementing strategic sourcing programmes (50%).
Figure 17: WHICH OF THE FOLLOWING COST-SAVING INITIATIVES HAVE YOU IMPLEMENTED IN THE PAST TWO YEARS?
Work with new suppliers Price negotiation with existing suppliers
91.8%
82.7%
Strategic sourcing programmes
50%
Reduction of the internal demand for products and services Low cost country sourcing Implementation of eSourcing projects
36.7%
33.7%
27.6%
Outsourcing
26.5%
Other No cost-saving initiatives have been conducted Downsizing
13.3%
1%
1%
70% 80% 90%
0
10%
20% 30% 40% 50%
60%
100%
Priorities for cost savings Organisations cannot pursue all cost-saving opportunities at the same time, owing to resourcing and time constraints. There needs to be a prioritisation of the identified opportunities, typically based on their cost-saving potential and ease of implementation. Identifying and prioritising opportunities for cost savings requires the use of multiple criteria and should not be based solely on spend analysis. A thorough analysis of each category should be done to identify the levers that need to be used for each category to deliver the projected savings. Category analysis is a structured methodology for reviewing the status of
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