A strategic approach to procurement can make savings that directly impact the bottom line, without beating up your suppliers in the process, says David Kendall
This article was first published in the June 2019 International edition of Accounting and Business magazine.
Today’s markets for indirect expenses are a moving target. The key to saving costs across all categories of indirect expense is to ensure that your cost profile is always aligned with, or ideally better positioned than, the marketplace and companies of a similar size and expenditure level.
Most companies are highly skilled in procuring raw materials, resale products and human resources. Rarely, however, do they apply the same strategic procurement approach to indirect expenses. Any savings that can be made across these 100-plus cost categories are essentially pure profit, and it doesn’t take many wins to make a significant impact on the bottom line and net value of the business.
Cost isn’t everything, of course; service and quality are equally important if not more so, but there are some simple steps that you can take to achieve a happy medium, potentially without even moving supplier.
First, it’s important to plan your strategy and approach for indirect costs at the budgeting stage. If you just base your forecasts on the prior year, you could be forced into reacting to contract renewals or issues as they arise.
When it comes to renewals, many companies renew early, but this is often influenced by brokers who are trying to secure their commission for the coming period. There should be only two drivers for early renewals: the need for year-on-year cost savings and a defined need for fixed budgets. If neither applies, it would be better to retender a few months down the line than make a wrong and costly decision. Deals shouldn’t be longer than 12 months unless there is a cost saving – after all, nobody has a crystal ball for where the markets are going.
Then there’s volume-sensitive pricing to consider. Are you actively managing your indirect cost profile – ie obtaining monthly activity reports from suppliers and monitoring them? Pricing for most indirect costs is volume-sensitive, but it doesn’t take much for activity levels to deviate from the agreed rate. Suppliers are often quick to penalise underactivity, but rarely proactive in correcting their pricing for increased volumes. It’s worth keeping a keen eye on this to ensure you’re getting the appropriate rate.
Another challenge is the increasing consolidation among suppliers as large corporate vendors expand into different markets and products. If you see your volumes are increasing with a particular supplier, you could suggest a rebate mechanism. Nearly all suppliers are familiar with this structure, and it can yield some meaningful payments if spend levels are high enough.
If you’re part of a group, it’s also worth considering group deals. Rarely are indirect costs managed congruently and consistently across all locations. We often see different offices paying different prices and buying different products. You should aim for one deal, one invoice, with one account manager, and implement simple controls to monitor activity.
What about your tendering process? It’s not ethical to ‘beat up’ your suppliers, and it will damage valuable relationships. The markets dictate what you should be paying, so you need to test them via a tender process. Be fair to suppliers – don’t go through a tender process if you have no intention of migrating. Set out your success criteria from the start, and by all means include the current supplier. Offer the final two or three suppliers a meeting and select the optimum solution. Tender blind and create a request-for-proposal document for high-spend areas.
Last but not least, you need to manage risk. You should ensure you have backup suppliers for indirect costs that are critical to your supply chain. The tender process will help you identify these.
If you build the above considerations into your strategy, you should be able to drive efficiencies in your procurement. Remember, it’s often a buyer’s market in the indirect cost space, and there is no commercial reason for paying over the odds.
David Kendall FCCA is a partner at Auditel UK.
"It’s often a buyer’s market, and there’s no commercial reason for paying over the odds"