Forbes.com

Buyer's recourse: Cashing in on procurement savings

A smarter, more comprehensive approach to procurement can help companies free up cash, fund strategic priorities and avoid layoffs.

By Greg Gerstenhaber, Sam Thakarar, David Fleisch and Emilia Fallas

First published on Οκτωβρίου 15, 2012
min read


Procured costs make up 25% to 60% of a company’s total costs, so you’d expect procurement would be top of mind for most companies. Yet the attention and resources devoted to procurement rarely matches the annual outlay it represents, which leaves an important source of margin untapped. A smarter, more comprehensive approach to what they buy and how they buy it can help companies free up cash, fund strategic priorities and avoid layoffs. The evidence is clear that procurement is an area that’s ripe for improvement. We recently surveyed executives about their experience with past procurement management initiatives. While most reported annual gains in their efforts to save, 72% of the respondents believe that they could do substantially better. Interestingly, this belief was held as frequently by the heads of procurement as it was by CEOs and CFOs. Yet some companies do get it right. Here are the steps that help those companies generate lasting savings. Look at the mix and consumption of what you buy. Eight in 10 executives say their procurement teams can influence the price of procured goods, but not the mix or consumption. Yet all three are critical cost factors. Consider the case of one appliance company that delegated most of its ocean freight decisions to the transportation department—whose primary focus was getting product through the supply chain on time. When the procurement department got involved, it discovered that the way the product fit inside shipping containers left 30% of the container space unused. Rather than haggling with the shipper to reduce prices by a percent or two, procurement worked with other business units to redesign how the product was assembled and packed, lowering consumption—and ocean freight costs—by 25%. Figure out if inefficiency—the vendor’s or yours—is adding cost. Your own processes can increase the cost of procured goods or make it more expensive for your vendor to supply you. Examining the total cost of ownership (TCO)—everything from supplier overheads to raw materials to the distribution costs involved in final delivery—can help uncover these costs. One building products company relied on external suppliers for labor on home sites, but found that only 60% of the labor hours it paid were productive because of poor coordination. For example, some workers arrived at the job site before their tools did. TCO can help companies and their suppliers find ways to generate sustained savings, yet only about one in three executives say their teams regularly use it to prepare for vendor negotiations. Take on fragmented categories. Companies buy poorly when many people can make individual purchase decisions in a single category—a problem identified by 77% of executives surveyed. One company discovered it had hired nearly 20 “Tier 1” (creative) ad agencies, with each sub-brand and sub-business buying from its own favorite vendor. Within six months, a team from the procurement department and a leader from each business reduced the Tier-1 spending to three agencies, producing a 10% to 15% savings that could be redeployed into additional marketing. Look at suppliers’ input prices with a new lens. As commodity or other input prices rise, suppliers come knocking, pushing through commensurate increases. But all too often, purchasers fail to negotiate lower prices when commodity prices fall again. A dashboard tied to key inputs can help reap savings. Even if you take these steps, beware. More than 70% of executives say their efforts to reduce procurement costs slipped significantly after only a year. Leadership attention shifts elsewhere. Behaviors begin to drift apart from the new policies. And cynicism grows, further handicapping future efforts. Improving procurement requires permanently changing behavior. That means hiring and involving the right people, communicating the change and installing closed-loop systems and processes to track it closely. The latter isn’t free—you’ll likely need analytical support within your finance or procurement teams. But the payback of sustained results makes it a high-return investment—and those results can spell the difference between a company that is able to make the strategic investments to secure its future and one that struggles to keep up. Greg Gerstenhaber is a Bain & Company partner in Dallas, Sam Thakarar is a partner in Boston and David Fleisch is a partner in Chicago. All three are members of the firm’s Performance Improvement practice. Emilia Fallas also contributed to this article. She is the global director of the Performance Improvement practice.

Procured costs make up 25% to 60% of a company’s total costs, so you’d expect procurement would be top of mind for most companies.

Yet the attention and resources devoted to procurement rarely matches the annual outlay it represents, which leaves an important source of margin untapped. A smarter, more comprehensive approach to what they buy and how they buy it can help companies free up cash, fund strategic priorities and avoid layoffs.

The evidence is clear that procurement is an area that’s ripe for improvement. We recently surveyed executives about their experience with past procurement management initiatives. While most reported annual gains in their efforts to save, 72% of the respondents believe that they could do substantially better. Interestingly, this belief was held as frequently by the heads of procurement as it was by CEOs and CFOs.

Yet some companies do get it right. Here are the steps that help those companies generate lasting savings.

Look at the mix and consumption of what you buy. Eight in 10 executives say their procurement teams can influence the price of procured goods, but not the mix or consumption. Yet all three are critical cost factors. Consider the case of one appliance company that delegated most of its ocean freight decisions to the transportation department—whose primary focus was getting product through the supply chain on time. When the procurement department got involved, it discovered that the way the product fit inside shipping containers left 30% of the container space unused. Rather than haggling with the shipper to reduce prices by a percent or two, procurement worked with other business units to redesign how the product was assembled and packed, lowering consumption—and ocean freight costs—by 25%.

Figure out if inefficiency—the vendor’s or yours—is adding cost. Your own processes can increase the cost of procured goods or make it more expensive for your vendor to supply you. Examining the total cost of ownership (TCO)—everything from supplier overheads to raw materials to the distribution costs involved in final delivery—can help uncover these costs. One building products company relied on external suppliers for labor on home sites, but found that only 60% of the labor hours it paid were productive because of poor coordination. For example, some workers arrived at the job site before their tools did. TCO can help companies and their suppliers find ways to generate sustained savings, yet only about one in three executives say their teams regularly use it to prepare for vendor negotiations.

Take on fragmented categories. Companies buy poorly when many people can make individual purchase decisions in a single category—a problem identified by 77% of executives surveyed. One company discovered it had hired nearly 20 “Tier 1” (creative) ad agencies, with each sub-brand and sub-business buying from its own favorite vendor. Within six months, a team from the procurement department and a leader from each business reduced the Tier-1 spending to three agencies, producing a 10% to 15% savings that could be redeployed into additional marketing.

Look at suppliers’ input prices with a new lens. As commodity or other input prices rise, suppliers come knocking, pushing through commensurate increases. But all too often, purchasers fail to negotiate lower prices when commodity prices fall again. A dashboard tied to key inputs can help reap savings.

Even if you take these steps, beware. More than 70% of executives say their efforts to reduce procurement costs slipped significantly after only a year. Leadership attention shifts elsewhere. Behaviors begin to drift apart from the new policies. And cynicism grows, further handicapping future efforts.

Improving procurement requires permanently changing behavior. That means hiring and involving the right people, communicating the change and installing closed-loop systems and processes to track it closely. The latter isn’t free—you’ll likely need analytical support within your finance or procurement teams.

But the payback of sustained results makes it a high-return investment—and those results can spell the difference between a company that is able to make the strategic investments to secure its future and one that struggles to keep up.

Greg Gerstenhaber is a Bain & Company partner in Dallas, Sam Thakarar is a partner in Boston and David Fleisch is a partner in Chicago. All three are members of the firm’s Performance Improvement practice. Emilia Fallas also contributed to this article. She is the global director of the Performance Improvement practice.