Three Occasions When Procurement Should Spend More – Reasons Two and Three

We announced our new research paper (sponsored by BravoSolution) a couple of weeks ago - Three Occasions When Procurement Should Spend More. And you can download it here, free on registration. Today we’ll feature the second excerpts from the paper.

So, when should we be prepared to spend more? Obviously, when that supports a lower total cost of ownership argument, then we have occasions when spending more will directly affect the customer value and therefore the long-term shareholder value of our organisation. As we say in the paper:

“There are many examples of this across every industry and sector, and it applies not only to direct ingredients that the customer consumes, as in the case of horsemeat. It may be components in a manufacturing environment. For upmarket cars, it may be worth spending more on a better audio system, or the latest intelligent window wipers! Using better designed components might extend the life of a capital item, benefitting the customer and enabling the firm to charge more.

And there are less obvious examples, where the customer benefit is less tangible but nonetheless real. Chocolate Easter Eggs are a good example, where spending a little more can bring a major increase in customer propensity to buy and therefore create shareholder value.

The packaging for the product can cost as much as the chocolate in the egg, but an original, distinctive and eye-catching design can drive huge percentage sales increases compared to a dull, standard box. (The author speaks knowledgeably as the brains behind the classic Milky Way Space Rocket Easter Egg, circa 1984!) Now that’s not to say that the cost of the ‘rocket packaging’ should not be managed effectively, but the fact that it might cost twice as much as a basic box is almost immaterial if it sells three times as many units.”

But even when the benefit of spending more may not be directly noticed by the consumer, there can be good reasons for doing so. Here’s an extract from the section covering the third of our three occasions.

“The most complex spend areas to consider in terms of this Value Category argument are those where the expenditure is a step removed from direct customer reaction, yet spending more can still drive shareholder value. This is where a little economic analysis comes in handy.

To illustrate that, let’s take Marketing Services spend as an example – although note that this analysis applies in some form to many spend categories, even those such as professional services, where the benefit might be considered to be even further removed from direct customer response. The point is though that the spending does not directly affect customer behaviour (as in the horsemeat example) – rather, the spending supports another activity, that in turn drives shareholder value.

Marketing spend, up to a point, has a return, we can assume - or presumably no-one would bother with it at all. Each pound, euro or dollar spent on marketing, which for many organisations is heavily focused on third party spend, should bring the organisation some return. If we could measure it precisely, and make the required linkage, that return would most usefully be expressed as shareholder value creation.

That benefit may be indirect however. Marketing engages an agency that can come up with a promotional video for the brand that goes viral and gets five million YouTube views. That is converted to some greater level of brand awareness, or perhaps click throughs to the company website, which creates a higher propensity to buy, which ultimately leads to more sales. So that video might drive an additional 2% sales on a £10 million revenue brand, worth £200,000 in revenue and £100,000 in gross margin. (If that is a sustainable increase, we might even look at a net present value of that rather than just a one-off gain). Shareholder value has been significantly increased, in any case”.

 

So, you can download it here, free on registration, if your appetite has been whetted. And whilst we’re on the subject of BravoSolution, a final reminder that the final Real World Sourcing briefing session of the year takes place at 11am on Wednesday 3rd December, at the Don restaurant in London. The theme is “The Twelve Days of Procurement Christmas”, so we’re going to make it an enjoyable session, but with some serious points too. We have just five places left, so book here and do come along for some merriment and interesting debate!

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