David Schannon: Unearthing the Hidden Treasure of Procurement

For most companies, procurement is the largest cost—and the largest untapped source of potential savings. But when done well, firms can achieve an average of 8 to 12% savings in a single effort. David Schannon, a partner with Bain's Performance Improvement practice, discusses how leading companies think differently about procurement by using three methods to capture full potential savings.

Read the Bain Brief: Unearthing the Hidden Treasure of Procurement

Read the transcript below.

DAVID SCHANNON: For most companies, procurement is a huge untapped source of potential savings. In fact, procurement spend is the largest single cost item on a company's P&L. And actually, we see across industries, procurement spend is generally north of 40% of total spend. So large, large opportunity.

However, most companies don't achieve full potential in capturing savings off of that spend. When done well, we see companies can achieve anywhere from 8% to 12% in a big one-time effort. And if they're able to sustain savings year after year, they can capture 2% to 3% off of that spend base. Now, leading companies do three things differently in order to capture the savings.

Number one, they expand the mandate of the procurement organization. And they think about the full range of savings levers. Not just the typical buy-better levers of negotiation and supplier selection that optimize how much you're paying for what you're buying, but also, they think about the spend-better levers.

Things like demand management and specification optimization and total cost of ownership. Where the decision sits outside of procurement and requires close collaboration between the business units, finance, and procurement in order to capture the value. Secondly, we find that while savings initiatives sometimes get implemented, often, the savings leaks out of the system and you can't track it into the P&L.

Leading companies will employ a closed-loop process that allows that savings to be tracked at the budget level and place accountability onto business-unit leaders who own the budgets to assure that the spend stays out and the savings are actually captured. And finally, leading companies will put in place the capabilities that are going to be required in order to sustain the savings year-over-year.

And so this shows up in the right procurement organization structure; decision-making roles; the right talent and skills within procurement; and the right change-management practices that procurement and the business unit can use in order to ensure this cross-functional collaboration really works. In sum, procurement can be a huge potential opportunity for savings. However, it requires companies to think differently about how they approach their procurement.

Read the Bain Brief: Unearthing the Hidden Treasure of Procurement