Implementing Procurement Efficiency / Cost Reduction Programmes – Aggregation and Negotiation

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 fourth in our list of six - aggregation and negotiation.

Having said that the "let's get all suppliers to reduce their prices" approach rarely works, there is of course still room for some old-fashioned leverage when it comes to cost reduction and efficiency gains. Applying aggregation - putting spend volumes together to achieve more buying power - and negotiating better deals is perhaps the most obvious way of driving savings.

Aggregation also has other benefits, such as reducing the cost of multiple buying processes or events. It can also help to drive standardisation, which again can have knock-on benefits such as greater internal efficiencies and lower total lifetime costs (e.g. maintenance charges). So here are some tips if you are looking to apply these principles.

  • Look for different parts of the organisation buying the same goods or services but doing it individually rather than in a coordinated manner. Bigger is not always better, but spend analysis can help to identify potential opportunity areas to bring spend together.
  • "Aggregate demand, not necessarily supply" is a great slogan to remember. Getting your arms around spend will always bring benefits, even if you decide the best strategy is not to let a single mega-contract or even framework.
  • Are there opportunities to aggregate even beyond your organisation - using collaborative buying organisations (in the public sector) or other routes perhaps in the private (the Coupa Advantage and "source with me" programmes are interesting examples of this).
  • Rather than the "reduce your price 5% or else" discussion with suppliers, a better basis for negotiation is to ask, "what can we do to improve value in terms of what we buy from you"? That negotiation may get into aspects such as specification (see our second article in this series) or how better mutual working might reduce costs for all parties.
  • Ensure that supplier price increases are not automatically accepted and that post-agreement changes aren't adding to costs through the contract lifetime. In some industries, changes and variations historically made up a large proportion of some suppliers' overall profits. Awareness, good contract management and robust negotiation can offset this risk.

Clearly, negotiation skills are essential here, but like some of our earlier articles in the series, effective stakeholder management is also a pre-requisite if procurement is to succeed (for instance) in bringing different parts of the organisation together for aggregated buying. Don't underestimate the resistance you might face as colleagues perceive you are restricting their freedom and control, so your arguments need to be convincing and well-rehearsed.

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