Implementing Procurement Efficiency / Cost Reduction Programmes – Market Management

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 in the first article in this series which we think pretty much covers it. Today, we will talk about the third in our list of six - Market Management.

What we have defined as market management covers a range of activities and ideas: choosing the right supplier, considering different ways of approaching the market, and getting the timing of the purchase right. It can also encompass options around using the market in different ways, for example, outsourcing services previously carried out internally.

Here are some tips for driving better performance in this area:

  • Consider whether markets have changed since you last contracted. Have new or better suppliers entered the market since you last explored the opportunities?
  • In particular, look at testing contracts that have not been renewed or re-negotiated for some years. That can range from long-term equipment or IT maintenance contracts to marketing agency agreements.
  • Make sure you understand the market and which products or services the market can offer most cost effectively. (This links back to our comments under "specification management" - are you buying standard or bespoke products).
  • Buying at the right time can bring benefits too. The classic example is IT equipment where a new product always commands a price premium. Prices then fall, quite dramatically just before it becomes obsolete. Commodity markets generate a different type of timing issue - unfortunately getting that right is far too big a topic to feature here!
  • Are there opportunities for using the market in terms of outsourcing activities currently carried out internally? These are rarely quick wins in terms of generating savings, but if you never start considering such options, benefits will never be realised.

Unlike our last two areas, demand and specification management, this one is taking us into more mainstream procurement activity and capability, where skills and knowledge around understanding markets, selecting suppliers and negotiation come to the fore. Indeed, skilled category management and deep knowledge of categories will certainly help to achieve benefits under this heading.

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