Implementing Cost Reduction Programmes – Logistics and Transactional Processes

As one of our readers pointed out recently, we forgot we hadn't published this final part of the series - our apologies for that. Better late than never!

As we said here, we are in a period of considerable economic and political uncertainty for many businesses and indeed public sector organisations too.  Uncertainty can be good if it leads to positive outcomes, but we suspect many organisations will be taking a cautious approach to planning and risk management. They may also be asking procurement functions to look at how an efficiency or cost reduction programme can be implemented.

We are big supporters of procurement playing a strategic role and helping to drive growth and revenue; but at times, our focus will inevitably be on those cost issues. So how can procurement deliver benefits, without resorting to the rarely effective (and frankly embarrassing) approach of “asking all our suppliers to reduce their prices by 5%”.

There are, when it comes down to it, only a relatively small number of ways in which the end goal of cost reduction can be achieved. We’re open to discussion here and being proved wrong, but we described six here in the first article in this series which we think pretty much covers it. Today, we will talk about the last in our list of six – logistics and transactional processes.

There are a wide range of possible opportunities sitting under this heading. That ranges through reducing stockholding or transportation costs, all the way to improving payment processes. The commonality here - the reason we have considered them together - is simply that they sit outside what we often see as the "core" procurement tasks around strategic sourcing, category and contract management.

Yet there are considerable costs and opportunities associated with these areas, but often both can be hidden. So reviewing these processes can be beneficial when seeking efficiency opportunities. Here are just some of the areas that might prove worthy of exploration: note that some are about reducing your third-party costs (traditional procurement activity, you might say), whilst other relate to reducing the cost of executing procurement activities or other internal operational costs.

  • Are the internal procurement processes and politics fit for purpose; or over bureaucratic and expensive, even if costs are hidden? For instance, are delegated levels of authority set at reasonable levels?
  • Are there opportunities to reduce the cost of low-value ordering and payment processes, such as use of purchasing cards, or other automation options that can achieve the same results?
  • Note however that channelling more spend through the professional procurement function (rather than less) might also be a potential route to savings if it has been badly managed elsewhere or simply not managed at all!
  • Moving to eInvoicing is perhaps not a route to rapid cost savings but undoubtedly has benefits. And depending where you are starting from in terms of your invoicing processes, a supply chain finance programme can certainly bring clear bottom-line gains, whether the benefits are considered to be "savings" or "income".
  • Have the logistics costs of inbound goods been properly analysed and considered? Might there be opportunities to consolidate deliveries or even buy "ex factory" and arrange shipping directly?
  • In terms of stockholding (working capital) costs, can responsibility be passed back to the supplier (“consignment stock") or are there simply opportunities to reduce stock levels and any external storage costs through analysis of stock levels, better planning and management?

Clearly, some expertise is needed in these areas, and it may well be that sits outside the procurement function - in finance or supply chain management perhaps. So we look for procurement to show leadership and some creativity here, whilst being willing and able to engage and work successfully in teams with colleagues in order to drive this sort of benefit.

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