Executives strive to increase corporate profits and hence shareholder value. Increasing sales is the traditional approach but with the present economic climate we all know that it’s really difficult. Worse still, increased competition means that pricing is under pressure.
Reducing costs is one of the few options left: it’s clear that one euro saved is one euro more profit. But does that mean: five percent saved gives a five percent increase in profitability?
With today’s low profit margins, a cost saving of one percent has a much greater impact than most executives might think.
Suppose a company has a profit margin of 5% and makes a cost saving on goods & services of 1%, then their profits will proportionately increase by 10%!
So, why aren't more executives focusing on procurement to drive competitive advantage and enhance their bottom line profitability? Often they feel that they have already done as much as is possible. However, CoAvant has found that many companies are using out of date procurement practises viewing procurement as a back-office activity rather than of strategic importance. For example, purchase agents are often judged on their ability to negotiate lower prices on a case-by-case basis when they should be working on better sourcing and optimising the overall cost of design to delivery cycle!
True performance is difficult to measure because many companies do not have the datacollection and management feedback mechanisms in place. (e-Procurement software ensures that this data is gathered and stored.) Interestingly, “good” companies strive to improve, “poor” companies with far more scope for easy improvements remain complacent. The “poor” companies only act when a crisis occurs. When executives focus on cost reduction its usually on reducing direct material costs and labour. Usually, most expenditure is here so it is a good place to start. However, some
companies consider that when direct costs are optimised there is nothing more to do! They forget indirect costs! Indirect costs can be huge, especially for non-manufacturing organisations. An average organization spends 40 per cent of purchasing expenditure on nonproduction (indirect goods) items like travel, office supplies and services.
More often than not, procurement “methods” associated with indirect goods and services is haphazard. Data reporting can be extremely weak. Many executives believe that, if they can bring about direct cost reductions, indirect costs will simply decline as well. The indirect volumes of goods and services (i.e., their usage, not their unit prices) usually do decline following direct material and/or labour reduction efforts. But companies that simply count on spill-over savings in indirect costs are leaving a lot of money on the table.
Surprisingly even very large enterprises with high level ERP tools often only use these systems for procuring direct goods, their systems are often “too heavy” for the procurement of indirect goods because these ERP tools are too heavy being typically extremely finance centric. Naturally, each case is unique; strategies tend to differ by industry, by company, and according to the company's level of procurement capability. Yet there appear to be five common themes. The companies who are best at procurement:
• Create a central procurement organization supporting multiple business units.
• Implement strategic sourcing with modern software based procurement tools in a category-driven programme. In effect, reduce overall effort and negotiate the best
deal ahead of the immediate need.
• Define team structures and skill requirements appropriate for category sourcing. In
some cases procurement engineers will help optimise the design of products.
• Capture procurement data to improve management and control.
• Manage the procurement function with a robust set of performance metrics, and link
team and individual rewards directly to procurement results.
However, until recently, purchasing has been treated as a backwater of business; a
‘Cinderella’ function, traditionally neglected by top management. That position is now changing, as compelling evidence emerges about the strategic and operational impact of purchasing as a lever for maximising shareholder value. Senior management should not see procurement as a back-office activity. They can considerably improve their profitability hence shareholder value via cost reductions by means of modern methods.
True e-Pocurement – a Key Success Factor
Difficult market conditions require aggressive cost down programmes.
In some organisations, very demanding cost reduction targets are being set. It is imperative that the full range of cost and value initiatives are examined to avoid the risk of cost management alone becoming a proxy for aligned purchasing strategy.
Modern software, such as the Brussels based “PurchasingConnect” (www.purchasingconnect.com) covers the entire purchasing cycle. See figure.
With the right software choice, e-Procurement is the most direct and effective ways for an organization to reduce costs, improve productivity, and boost profits. e-Procurement automates and streamlines the acquisition, management, and control of expenditures by creating a possibly Web-based, self-service environment that pushes product selection and order initiation to the desktops of frontline employees while maintaining corporate trading agreements, workflow, and rules.
Adopters of e-procurement have been able to realize the following benefits (Aberdeen Group):
• Reduce prices paid for materials by 5% to 10%;
• Shorten requisition-to-fulfilment cycles by 70% to 80%;
• Lower administrative costs by 73%;
• Cut off-contract ("maverick") buying in half; and;
• Reduce inventory costs by 25% to 50%, on average.
For example, typically, the costs of traditional purchasing are between 50 to 250 euro per order. But the situation can change. By using e-procurement, costs can be cut to between 5 and 20 euro per transaction.
E-procurement consolidates purchasing – if there are separate divisions or departments purchasing is coordinated to maximise discounts arising out of bulk purchasing power. Administration costs time and money. Consolidating your purchasing improves cash flow and reduces administration.
With e-procurement it is very easy to get alternative quotes. You are able to advise your existing suppliers that the business is being tendered. Of course it is possible to give existing suppliers a chance to compete and reduce their prices!
Some procurement solutions offer SRM (supplier relationship management), which keep
relationship data that will save time and can be used to build improved relationships with suppliers. E-procurement is able to interface with your suppliers in various ways. Some systems can even send interchange data entirely electronically between organisations.
source from http://www.itscan.be/files/e-Procurement_EN.pdf
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