Procurement plays a vital role in developing and implementing business strategies, such as expanding organically, introducing new products/services and managing risk. However, cost reduction is still the number one priority for most CPOs in today's tumultuous times.
How can you identify potential savings opportunities and what is important to consider when realizing these?
Adequate insight into your data, through spend and procurement analytics, is absolutely crucial to identifying opportunities for cost reduction. The analyzes give you the insight you need to make smarter decisions and priorities.
Below we have provided some tangible procurement analyzes for selected strategic measures that can help you identify potential savings for your business.
There are several strategic levers to reduce procurement costs - bundling, or consolidating spend, is one of them.
Consolidating spend usually results in significant savings (A. van Weele, Purchasing and Supply Chain Management, 1998). In short, bundling refers to securing standardized contract terms with the same supplier across the business, or consolidating spend with one or fewer suppliers than the status quo. The Deloitte Global CPO Survey for 2019 shows that consolidating spend is the most important procurement strategy for CPOs in 2020.
Example of analysis: Spend and number of suppliers by category
To identify bundling opportunities, you should analyze the number of suppliers used across spend categories and total spend per category. See analysis example in the figure above.
In some cases, it may be appropriate to use multiple suppliers per category, despite the fact that the products or services are relatively standardized across the supplier market. But this is certainly not always the case. For example, if you use 10 workwear suppliers with an annual spend of 50 million, there is probably a considerable potential in consolidating spend.
Example of analysis: Contract loyalty (or maverick spend) by categories and departments
Analyzing contract loyalty or maverick spend across categories and the organization (e.g. departments, business units etc.) can also highlight savings opportunities. See analysis example in the figure above.
Many companies have supplier contracts in place to meet all their needs in the different categories, but often have challenges related to maverick spending. If contract loyalty is low per category, and throughout the organization, you must take actions to ensure that spend is consolidated with your priority suppliers.
Please note that this type of analysis can also be used to identify categories where you do not have sufficient contract coverage today.
One commercial strategic lever, often referred to as a "quick win", is to renegotiate your existing contracts. A negotiation can yield significant savings through improved contract terms.
Example of analysis: Spend growth by supplier
To identify possible renegotiation candidates, we recommend analyzing spend growth for the various suppliers. See analysis example in the figure above, where spend growth is measured by CAGR (Compound Annual Growth Rate).
Higher spend growth will, all other things being equal, indicate greater opportunities to negotiate better contract terms. The insight must, of course, be validated in the context of the underlying contract terms, if a contract exists. Nevertheless, your bargaining power is probably better if you can showcase a solid growth, especially if the actual volumes are significantly higher than at the conclusion of the contract.
Example of analysis: Share of wallet and supplier profitability
Combining external data sources with your own spend data often provides additional perspectives on savings opportunities. In the analysis above (the "Ignite Matrix"), we analyze our share of the supplier's turnover (share of wallet) and the supplier's profitability (EBIT margin).
A larger share of wallet says something about your importance as a customer, which in turn can indicate a more solid bargaining power. If the supplier also enjoys high margins, for example compared to its industry peers, you need to ask yourself; Is the collaboration well balanced? All else being equal, we are better suited to negotiate with suppliers that we are important to and/or who benefit from higher profit margins.
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Fact-based and structured processes are critical to ensuring significant and sustainable results. To maximize the chances of realizing savings, you need to have a structured plan and establish the appropriate follow-up procedures. If you work ad-hoc without the necessary data and a concrete plan, you will never be able unlock your full potential.
Important criteria to consider in the process are:
Please note that you can download our template for more information on critical success factors to succeed with a procurement project.
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