This week’s featured webinar was presented by the Next Level Purchasing Association and featured Joe Payne and Bill Dorn from Source One Management Services as the main speakers. You may also know them as the co-authors of ‘Managing Indirect Spend’, a relatively new publication that walks through the challenges and opportunities associated with indirect spend as well as a few category-based case studies.
Like their book, the guys from Source One kept their speaking points to the practical learnings from their extensive combined procurement consulting experience.
Find Efficiency without Sacrificing Effectiveness
Many procurement teams function on the three bid standard – looking to put an RFP or RFQ out to three suppliers to collect comparative pricing. It may be a great way to gather information in a time crunch, but it won’t bring the best results. Rather than focusing on disqualifying suppliers before the sourcing process really begins, bring in as many possible solutions as possible and let the RFx and scorecard process do the qualifying.
That being said, suppliers can tell if they are being used to complete the candidate pool rather than having a real chance at the business. Only invite suppliers that have some chance of winning your business.
Before going to market, consider the timing. How does your historical pricing compare to current available pricing and how strong is your leverage? In some cases, you will be better off extending a current contract than trying to negotiate new pricing against the dynamics of the market.
Since we’ve already established that constraining the number of participating suppliers isn’t the most effective way to save time, what is a procurement professional to do? Revisit your basic RFP documentation to make it work for you. Are the questions and the responses they will elicit really going to have an impact on your decision? Who wrote your documents? When were the templates last reviewed? Did a supplier help write the RFP? Bid optimization goes beyond pricing scenario analysis and starts before the event is open for responses.
The Budget Battle
The current trend of procurement reporting up through finance has created a new set of challenges for us to face. The primary disconnect between the two departments is on how procurement’s activity affects the organization. Finance has a budget-based viewpoint, which can serve as a blinder to much of the value created by procurement.
- When purchase volumes exceed estimates, finance sees an increase in line item spend versus a per item savings of x%.
- Many times, departments re-allocate their spend before it has an opportunity to reduce their budget.
- Even in the case of a contract that automatically renews with pre-determined price escalators, finance may limit the credit they are willing to give. When procurement gets involved and not only eliminates the 5% increase and gets 3.5% savings, only the 3.5% is likely to be credited.
How do you add value when your company’s volume is not enough to drive pricing lower than can easily be obtained in the market? Break costs down into component costs and tie raw materials to an appropriate index, using a cost plus model in the contract. If the index or market falls, the cost difference is not savings that procurement can claim against their targets.
One way to bridge the gap with finance is through the reports used to track results. All reports should either allow a conclusion to be made or motivate action. Ideally, you want reports that both represents and drives savings. Whether your reports are granular (e.g. cost center level) or summary, projected v. actual or realized, effective measurement requires collaboration – between departments and suppliers.