Procurement 101The Universal Value of a Procurement Cost Reduction Strategy [Audio]
There are two methods that can be used to improve a business’s bottom line:
- Increasing sales (not covered in this piece)
- Reducing costs (you’re in the right place)
Sounds simple, right?
But in fact – it’s a wildly complicated process.
Adjusting the strategic methods used to facilitate cost reduction requires overhauling the policies and procedures used to conduct all procurement operations.
This presents a challenging obstacle for professionals that are looking to propose cost reduction ideas to administration – and makes it difficult to begin cost-saving initiatives in the workplace.
If your team is looking for ways to reduce operating expenses in business, your procurement cost reduction strategy is the area you’ll want to focus on.
To convince administration that this is worthwhile, there are two points to gain from this article:
- A clear value proposition as to why a procurement strategy will benefit your team
- Providing your team with a plan that clearly indicates how to initiate the strategy
With over 30 years of procurement experience, Hani Abdou provides a definitive view of procurement’s value in any organization as part of UK Business Reporter’s “Future CFO” report.
Abdou has also been featured in the past as part of a separate series on the future of procurement management.
Whether you’ve got 15 minutes to listen to the full question-and-answer interview or 3 minutes to skim and extract key points from this article, you’re sure to walk away with a crystal-clear value proposition for initiating a procurement cost reduction strategy in your business.
Listen to the full question-and-answer style interview here:
Read the accompanying article on Forbes: The CFO Dilemma: Implementing Spend Management Solutions in 2020
Or, listen to dedicated audio segments throughout this article.
Introduction – The Challenge of Modern Procurement
When every aspect of a business is growing harder and harder by the day, it becomes easier and easier to drop the ball.
(Kangaroos can get away with dropping the ball – successful businesses can’t.)
In an increasingly complex world, procurement is no exception.
Chief Financial Officers (CFOs) need to:
- Avoid bad suppliers
- Resolve disputes quickly
- Stop maverick spending
- Keep budget discipline
But the current methods and technologies are prone to cracking under the pressure.
How can finance teams change the game?
What do they need to change?
What does the solution look like?
Procurement professional Hani Abdou shares his insights today.
Procurement is trading with external partners. What is its role in the global economies?
In every organization (regardless of size or industry) you find that procurement plays a major role in their activities.
If you look closely, you’ll find that everything businesses need to perform their daily tasks and to accomplish their goals must be procured.
- Other means of procurement
The allocation of funds must take place for the business’s required products and services.
Let’s start with the private sector.
Their success is measured by calculating the difference between their sales and the cost of the things they procure, which is referred to as net profit or loss.
Of course, the higher the profit, the better – and the way to achieve that, if not by increasing sales, would be by lowering the amount they pay to procure the products and services they need.
In the public sector, however, it’s a little bit different.
Their success is measured by what they are able to offer with the available budget they have.
Their success is mainly dependent on the effectiveness of their procurement processes.
So, as you can see, effective procurement is essential, for any organization, the way to achieve success.
Procurement optimization is a critical success factor in organizations of all sizes and across all industries.
(Without a proper procurement strategy to guide their operations, businesses are throwing funds straight out the window.)
So how much money do you think global businesses are losing because of failures in the procurement process?
You’ll find many incidents where large and high profile companies had to file for bankruptcy due to the failures in their procurement process.
On the other hand, you’ll find others who have thrived due to their effective procurement strategies.
In order to put this into perspective, let’s use numbers pulled from a report compiled by Levvel research. They’re known for their in-depth research in this field.
The organizations that were able to implement proper procurement processes were able to save up to 8-10% of their total purchases or expenses.
So I made a quick calculation, assuming that on average the purchases or expenses of most businesses come to about 90-95% of the company’s revenue.
The total savings for a company with yearly revenue of 50 million pounds would be around 4 million pounds a year.
Using the same formula and applying it to the 2019 UK budget which was around 820 billion pounds, the savings would be around 80 billion pounds.
Procurement cost reduction initiatives have the potential to secure a tremendous level of tangible financial value.
What does a bad day for a CFO look like?
I believe that the worst nightmare for most CFOs would be uncertainty like any other decision-maker.
Having the right information at the right time is what matters the most.
Being in the dark puts them at a high risk of making mistakes.
(Do you think teams can make effective financial decisions without the right information?)
And as I mentioned before, mistakes in procurement could be devastating to any organization.
A mistake could simply mean paying more for what they purchased or getting less than what they paid.
But it also could mean much worse than that – when they find themselves getting tangled up in liability issues and legal disputes.
This is why I think that CFOs need to use tools to help them in getting a high level of visibility, and a system that provides them with full transparency and control over the whole procurement process.
An effective procurement strategy empowers informed decision making by providing desired information to the right stakeholders at any given time.
Procurement is nothing new, it’s been around for a long time. What’s made it so complex that financial teams are now struggling?
Procurement has always been a complex and very sensitive matter.
But it’s become a lot more challenging now because everything is expected to move at a much faster pace.
A transaction that used to take a week or two to complete is expected to be done in one day.
Therefore, it’s become critical to use a system that can facilitate a smooth flow of communication among stakeholders, and provide all of the information needed – when it’s needed – by decision-makers.
Successful cost reduction strategies must have the capacity to maintain an agile pace of procurement operations without compromising the quality of complicated workflows.
Do you have any specific challenges or obstacles worth drawing attention to?
Typically a procurement process involves a high number of stakeholders, working within a timeframe and exchanging a large amount of highly sensitive information.
When we say stakeholders here, it includes:
- The individuals or teams that create the orders
- The individuals or teams that approve the orders
- The buyer who is responsible for allocating the order
- The supplier who will be sending the offer
- The technical individuals or teams who will be evaluating the received offers
- The individuals or teams in charge of receiving and paying for the orders
So, among all of these, there should be smooth communication throughout the process. And they all must have access to all the data they need when they need it.
In addition, all of these activities must be documented to help management in evaluating and improving performance and in resolving any internal or external disputes.
Procurement involves many operational teams and departments, all of which must be able to communicate and collaborate efficiently to work together in reducing costs.
(Procurement involves many different internal and external channels – it can be tough to keep it all organized!)
How much cost could and should CFOs cut, and how can they cut it?
The cost cuts – or the cost savings – can be grouped under 3 main categories:
- Lowering the cost of purchases: this can be done through improving negotiations with suppliers to be able to get better deals on the products or services being purchased.
- Mitigating maverick spending: this can be achieved by applying effective approval rules to ensure better control over what’s being purchased and avoiding unnecessary spending.
- Cutting the time needed to perform the tasks: the average division of procurement labor time is:
- 49% of time is spent on ordering materials and services
- 17% on managing suppliers
- 14% on developing sourcing strategies
- 20% on selecting a supplier and managing contracts
It has been estimated that on average, the time savings that can be achieved are around 60% to 80% of this labor time – by implementing a good procurement system.
An effective procurement cost reduction initiative provides value in the form of reducing operational time expenditures.
(When policies, procedures, and tools align, procurement begins converting that efficiency into business value.)
Earlier you mentioned the importance of visibility as one of the biggest threats that finance teams are facing. What are the elements of the procurement process that may be hidden?
Unfortunately, the cases of under-the-table deals are endless.
But there are also many issues that happen due to innocent mistakes.
Most of these innocent mistakes that happen are either because of a lack of information, or due to some sort of miscommunication.
Whether innocent or not the results could be:
- Maverick spending
- Quality variations
- High cost of purchases
- Missed delivery times and dates
- Legal disputes
Applying policies to improve transparency can certainly mitigate such risks.
An optimized procurement strategy reduces the risks associated with a lack of business cost visibility.
You talk to financial teams all the time – what are the choices and the flexibility that they’re looking for in a system?
To answer this question we need to explain how to set up a complete procurement strategy – which is a huge topic by itself.
In brief, the strategy is an administrative document that contains a policy to regulate the following:
- The P2P (purchase-to-pay) process
- The strategic sourcing process
- The supplier relationship management process
- The contract management process
- The spend analysis and control process
These policies are made of a number of different procedures explaining how to perform each part of the process.
The flexibility financial teams are looking for pertains that the selected solution should provide effective tools to help them in streamlining the workflow according to the established procedures within these policies – and to also allow for any future changes in these procedures if needed.
Establishing policies is the best way to start a cost reduction initiative – followed by embedding those policies into a company’s procedures along with the right tools.
The market is full of ERP software and smart applications. Why aren’t they enough?
ERPs usually offer modules for each function starting with a module for financial accounting. Then, the company starts adding the other modules they need – like warehouse management and procurement in many cases.
What the ERP offers for managing procurement does not effectively cover the company’s needs according to their established policies, or it could be too complicated or too costly.
This is why most CFOs have started looking for a solution that would better serve their interests.
A procurement strategy is made up of different policies. These policies enhance the efficiency of the procurement process by alleviating confusion during operations.
What’s your solution?
The name of our system is Tradogram.
It’s a SaaS product designed to mainly help medium-sized organizations from almost any industry or sector to manage procurement and control their spending.
Our technology provides effective user-friendly tools to facilitate all of the procurement related communication on the same platform and to have all of this data properly documented.
This provides management with access to view everything happening in real-time.
It also gives them access to a wide range of reports to help them evaluate the performance and discover any deviations at the right time so that they can take corrective actions and minimize any possible damages.
Tradogram is a simple and powerful procurement system designed to meet the needs of modern CFOs who are leading business cost reduction initiatives within their organization.
(Tradogram is the closest thing to an “out-of-the-box” procurement software solution on the market.)
How does your solution make the financial team work faster?
The answer is accessibility and automation.
Through cloud computing technology, we’re able to offer our customers full accessibility to their accounts from anywhere, whether they’re using:
- A desktop
- A tablet
- A cell phone
They can access their accounts anywhere with internet service.
In addition, the auto-fill function saves the users a lot of time and effort in completing the forms based on the previously filled data.
Configuring the account properly at the beginning means automating the process according to the established policies – which removes confusion and eliminates unnecessary delays.
A procurement system is a tool used to enforce and enhance the effectiveness of established procurement policies as part of the overall procurement strategy.
(“Moving at the speed of procurement” can look like this when the right strategy is used.)
What does the installation of Tradogram look like?
You’re absolutely right. Implementing a system or a new solution is an extremely sensitive issue and it’s rightly a major concern among solution makers – therefore this matter has always been taken into consideration while developing Tradogram – right from the beginning – to ensure a smooth and efficient implementation
An account manager from Tradogram usually works with new customers to help their management team in setting up the account according to their strategy and to upload all of their procurement-related data like items, vendors, their users, and other data.
Depending on the customer’s promptness and the flexibility of their strategy, this phase usually takes between 1 to 6 weeks. Then we provide them with training sessions to help those who will be using the system. It’s a self-guided and user-friendly system, so very little training is required in most cases.
In addition, we also offer an online customer service desk to answer any questions that may come up while working on the software, as well as a knowledge base resource with tutorial videos to show users how to use any function and to answer any of their questions.
I can confidently say that with Tradogram the implementation concerns have become an issue of the past.
When selecting a new procurement system, decision-makers should consider solutions that align with the requirements of their predicted implementation process.
(Selecting the right procurement system is the final screw in any well-built procurement machine.)
Procurement cost reduction strategies are nothing new – but the pace of the game has changed.
As the overall speed of business has increased over the years, procurement systems are needed to ensure purchasing policies and procedures don’t cause bottlenecks that disrupt the standard tempo.
CFOs and financial decision-makers need to pay close attention to optimizing the procurement strategy as part of measuring success in their KPIs.
To create their strategies, businesses must develop procurement policies that support the structured needs of their operational procedures.
Finally, the selection of a procurement system then supports and solidifies the procedural purchasing processes in accordance with the established policies.
This provides an agile value creation channel by securing ongoing procurement cost reduction.
As part of your evaluation process for the right system learn more about Tradogram to gain an understanding of the unique benefits and features this procurement software suite has to offer.
Unlike most providers, Tradogram allows you to create a free-forever account to test all of the functionalities first-hand.
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