Procurement leaders have always played a pivotal role in driving their organizations forward — optimizing external spend with suppliers and building competitive advantage in terms of cost, quality, availability, and sustainability. Considering that external spend typically represents a significant portion of a company’s total cost, the role of an experienced and efficient procurement team cannot be overestimated. As the past two years zoomed the microscope on supply chain pressures, procurement teams responded in force — sourcing protective gear for employees, building alternative vendor relationships and deepening their already sharp focus on crucial spend analysis tactics.
While the pressures continue, it’s crucial to start identifying new insights and opportunities that can build your competitive advantage. Here are four ways procurement leaders can use the power of data to evaluate spend, consolidate key areas of their operations, and save money in this year beyond.
1) Enhance your spend forensics
Improperly managed spend has a negative impact equating to 1% - 2% of annual revenue for most corporations. A typical company spends 15%-30% of its revenue on indirect spend. MRO (Maintenance, Repair & Operations) comprises 3%-5% of that spend, so for a $1B company, MRO could be $30MM - $50MM.
The focus on analyzing organizational spend has grown over the past few years with a variety of influencing factors including ever-tightening budgets, supply chain challenges due to global crises, and the availability of increased technology tools to gather actionable insights more quickly. Whatever the rationale behind the effort, organizations recognize that collecting and reviewing data — along with detailed analysis — can drive a variety of performance and profitability improvements overall.
With an understanding of where your organization stands at a given point in time, spend analysis starts as a feather in the cap for building a more strategic procurement organization and driving measurable results over the short and long term. Spend analysis supports CPOs in the shift away from mere cost containment (or reduction) to positioning the procurement organization as a value-generating arm of the corporate function.
Through the identification, collection, classification and analysis of complex spend data from across your organization, spend forensics can deliver:
- Cost savings identification through greater spend visibility
- Deeper and more strategic supplier relationships
- Improved buying power and more strategic sourcing
- Procurement team efficiencies
- Greater ability to identify and manage risk
2) Digitize sourcing and procurement
Buying silos are never ideal but have developed in many organizations for a variety of reasons: business units operating separately on purpose, M&A activity, poor interdepartmental communication or simply the need to acquire goods or services quickly in one area of the business.
It goes without saying but digitizing the procurement function — where information can be easily shared across the enterprise in real time — enables greater visibility and better-informed decision making for forward-thinking organizations. Gone are the days when companies could remain competitive by consolidating their buying power to drive better pricing, rebates and volume discounts. Today, more and more organizations are viewing their procurement operation as a strategic driver for better financial results. The fundamental for success in today’s climate is digital connectivity.
Centralized sourcing and procurement are still valuable — as its sole aim is to minimize duplicate contracts that exist across different business units or geographies, synchronize billing cycles, streamline goods receipt, and better plan for any future M&A activities or consolidation that could impact purchasing. However, when combined with digital connectivity — where all of the key stakeholders across the procurement enterprise have real-time access to relevant information — organizations begin to create a new operating model and a richer paradigm for success.
3) Conduct regular contract audits
Spending time up front on regular contract audits gives your procurement team the opportunity to identify contract compliance issues before they become major liabilities. If this isn’t already part of your standard operations, quick start the auditing process with a few simple steps:
- Establish a contract depository for both current and archived contracts and agreements.
- Assign a team to conduct a monthly review of existing contract end dates, looking several months out to avoid accidental (and often costly) auto-renewals.
- Conduct a monthly reporting review to identify price variances, payment term abnormalities and overpayments across your enterprise. Ensure that any price increases align with contract terms.
When you start conducting regular audits, you’re likely to find some big savings and opportunity areas. Use this information as a baseline and empower your procurement team to set goals and achieve measurable results both over the short and long term. Keep in mind the largest savings are often found in the tail spend. Attention to detail with even the smallest vendor relationships can really add up over time.
4) Speed your results through strategic partnerships
80% of high-performing procurement organizations distinguish strategic from operational models.
These suggestions for savings make logical sense but actually putting them into practice is likely not so quick and easy. Busy procurement teams at most organizations don’t always have enough time or resources to get strategic about data, consolidate systems and take action to make a measurable impact. The quickest way to get results is to work with a partner you can trust to do much (if not all) of the legwork for you.
For example, by outsourcing supplier management to a trusted partner can help you:
- Facilitate and manage relationships with preferred suppliers
- Conduct semi-annual supplier performance reviews with your procurement team(s)
- Ensure SLAs are in place and met
Engage and work with integrators to improve processes and align to preferred partners while reducing direct buy costs
Then, if you need to consolidate systems or bring on a new tool, your internal resources can spend their time focused on these core initiatives — while getting your back office in order with the help of strategic partners to deliver both short- and long-term, data-driven results.
Ready to get started? Learn how Conduent can help you infuse working capital back into your business with zero risk.
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