Implementing Procurement Efficiency / Cost Reduction Programmes — the 6 Key Areas

As we said the other day here, the indicators post Brexit referendum in the UK are mixed in terms of the economic outlook. We have optimists and pessimists in the media, that’s for sure. But there are many other factors on the economic and political horizon, from the unresolved banking crisis in Italy to the Turkish situation, from refugee and IS terrorist threats to the US Presidential election.

What this undoubtedly adds up to is a period of 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.

With that in mind, we also suspect that many procurement leaders are being asked what they can do to help their organisation through potentially difficult times. Now of course some of that may be driving top-line growth through innovation, collaboration with suppliers and so on, and we are huge supporters of the procurement function having that role. But we can’t escape the reality that many procurement functions will be tasked with saving money to improve the bottom line through cost reduction and efficiency.

So in the next couple of weeks, we’re running a series of articles simply reviewing the different types of activity that can be used to drive that sort of benefit. Many of you may find some of this a little basic or obvious, but we have tried to be relatively complete rather than just looking for the particularly smart or leading-edge options.

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 here are the six that we consider to cover all the bases.

  1. Demand management – “the easiest way to make a procurement saving is by not buying something”!
  2. Specification management – ensure what you buy is fit for purpose and maximise value for money
  3. Market management – get the most out of the markets from which you buy
  4. Aggregation and negotiation – use your buying power in the most effective manner
  5. Contract and supplier management – maximise value after the contract has been let
  6. Logistics and transactional processes – improve the processes that support how goods and services are acquired

When organisations hit the panic button, often the only one of these that is really addressed is number 4. “Go and tell all our suppliers we want a 5% price reduction” is the cry from the boardroom. Of course that doesn’t work – so it’s much better if procurement can be on the front foot and ready with a coherent approach if it looks like an efficiency or cost reduction programme is on the cards.

So we’ll be back with a further article on each of those six over the next couple of weeks. As we say, the more experienced reader may not find much that is startlingly new, but if nothing else, it might be a useful reminder of the range of tools and techniques procurement can apply.

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Voices (8)

  1. William McDonald:

    How do i accesses these follow up articles on the six methods ??

    1. JP Morris:

      Hello, Mr. McDonald. We’ve updated the original post with links to the six methods.

      Thanks for bringing this to our attention.

  2. Marco:

    Dear Peter,
    I have been constantly reading the first 5 of 6 abovementioned topics, but I cannot find the 6th one which is on “Logistics and transactional processes”. Where can I find this issue?
    KR, Marco

    1. Peter Smith:

      You know, this suddenly hit me at the weekend – that I never published the final part – well spotted! It will be with you soon. Thanks and apologies.

      1. Marco:

        thx for your prompt response. I’m looking forward to reading the last issue of your series.

  3. bitter and twisted:

    Why do you call it ‘cost reduction’ and not ‘profit improvement’ or ‘outcome improvement’ ?

    1. Peter Smith:

      Because sometimes “cost reduction” is what procurement is asked to deliver – particularly if there is a perceived crisis. I agree, “profit improvement” is a better term and as I said in the article, really “value” is the key to what we should be doing. but I think we need to recognize that sometimes the Board has a pretty direct view of what they want from procurement, and you either go along with it (whilst still trying to actually do sensible things), or you get out!

    2. Nearly caught short:

      ‘Outcome improvement’ sounds far too vague. I had an outcome improvement the other day when I found an extra toilet roll wedged up the dispenser – saved me a lot of potential grief!

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