Making Savings Stick (Part 2)

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In the second of this two-part article, , 4C Associates’ Bob Friend examines how leading procurement departments can reduce the gap between negotiated and realised bottom-line savings.

The gap between savings identified and negotiated by procurement and those which actually impact the bottom line, remains an issue in many businesses. In part one, I considered how defining savings and then implementing the correct tracking approach is vital for procurement departments looking to make savings stick.

This post will examine the three remaining themes which often plague procurement departments looking to maximise their impact. As I mentioned previously, each organisation will face varying degrees of difficulty in these areas, but broadly speaking the following need to be tackled:

  1. Savings definition and tracking approach
  2. Stakeholder engagement and accountability
  3. Standardised and enabled P2P channels
  4. Compliance policy and management

Stakeholder engagement and accountability

While it has always been key, the need for procurement to engage effectively with stakeholders has become increasingly important. This is because procurement’s involvement in areas of indirect spend has grown substantially.

The function now works with a wider, more diverse stakeholder community, traditionally used to higher levels of discretion on how and with whom purchases are made. In addition, the trend towards more centralised procurement organisation models highlights the risk of the function operating within a silo. Better engagement ensures stakeholders accept their accountability for complying with sourcing decisions.

To achieve this, business and procurement processes need to be aligned. Not always an easy task, but one which can often be achieved by agreeing how business priorities will be supported by procurement. It is also vital that procurement provides cost insight, to help the business prepare annual budgets and facilitate discussions with finance, to agree how target savings will be locked-in.

Another key element is making sure stakeholders are involved in the sourcing process, in terms of defining requirements, evaluating bids and approving selection decisions. This goes hand in hand with optimising supplier performance and relationship management processes and formulating clear stakeholder roles.

Standardised and enabled P2P channels

Many organisations invested in P2P technology to help control and automate transactional processes. To drive an efficient “hands free” operation and improved spend control, P2P systems need to channel demand seamlessly to the supply agreements put in place by procurement.

Where the creation of requisitions and orders is fully integrated with automated planning processes and systems (particularly involving ERP systems for direct spend and for MRO inventory items), the transaction channels are more visible and easily controlled.

Indirect spend typically allows for more variation in the type of order transaction used (i.e. blanket orders, catalogues, free text orders). To ensure consistent use of the appropriate approach it is essential for procurement to develop and own a clear P2P transaction channel strategy.

This usually involves defining which transaction methods should be used for specific categories or types of spend, addressing all transactions in the end-to-end process and integrating the latter with sourcing and supplier management strategies. It is also important to align the approach with technology enablement and supplier collaboration plans.

    An effective P2P process

The P2P channel strategy provides procurement with the opportunity to rationalise demand specifications progressively. This includes the purchase of services, which can be standardised to facilitate ease of purchase for the user and control of spend.

A key indicator of the effectiveness of the P2P process is the level of unmatched invoices (or first-time pass rate). This is where lack of control, poor ordering discipline and compliance create visible problems. Poor performance at this point of the process can be a major cause of cost inefficiency.

Compliance policy and management

A common challenge for many organisations is embedding compliant, cost-conscious buying behaviour across the business. This is a particular challenge for indirect spend, where there is traditionally a level of buying discretion amongst budget holders.

Organisations with high levels of buying compliance (i.e. compliance with the defined buying channels and associated suppliers) usually share a number of features. First off, compliance policy is formally defined, widely communicated to the business and included in personal business conduct commitments. Category-specific policies are integrated into and made visible at each stage of the buying process.

Compliance is also formally tracked and reported on a regular basis. Incidents of non-compliance are analysed and corrective plans are developed and implemented. Methods for enforcement can vary, but can include personalised communication from the CFO, department league tables and even disciplinary sanctions.

Optimising value

Procurement has become a more centralised, global function, organised along spend category lines and deploying deep category expertise. The function operates at a more strategic level than ever before and has seen its footprint expand beyond traditional direct materials to cover indirect spend categories. This new remit requires new skills to manage a wide range of goods and simple and complex services.

As a result, procurement’s contribution to business performance has become increasingly important and so too has the need to bridge the gap between identified savings and bottom-line results. Putting in place the appropriate capabilities to maximise the delivery of savings is essential to optimising procurement’s value to the business.

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