After months of negotiating, the contract is signed and big savings have been achieved. But are these negotiated savings in the contract being realized in practice?
Contrary to what many believe, procurement savings do not necessarily happen with the signing of a contract. Rather they happen in the execution of the contract.
In fact, it’s been found that companies typically do not capture 30% or more of negotiated savings, and, according to some studies (like the one below), up to half of negotiated savings may be lost without best practices to support them:
Source: The E-Procurement Benchmark Report, Aberdeen Group, August 2008
Good procurement managers realize savings are purely theoretical unless steps are taken to capture the discount in practice.
The three keys to capturing these negotiated savings are outlined below:
- Define The Goals
So it was with the moon landing, so it is with achieving cost savings in procurement. Nothing truly remarkable was ever achieved without a good plan and clearly defined goals.
The first step in establishing such a plan is to make sure it is in step with company goals. Before pen hits paper, procurement managers should have a strategic planning meeting with senior leadership to establish organizational goals. What targets are senior leadership looking to achieve this year? Procurement goals can then be tailored to meet and assist in hitting those objectives.
Procurement managers can then brainstorm all the possible cost savings with specific goals in mind. Direct reports should be included in these discussions to bring about the widest range of options. Doing so also makes employees feel like they are part of the process and have a vested interest in seeing it succeed.
When asked, employees will have a tendency to suggest modest goals to avoid the possibility of failure. Managers should seek to find the balance between setting a high bar and what is actually possible with the current team and situation.
While a good plan and goals establish direction, it is important to remain flexible in the execution. As a Prussian army general once said, “No battle plan ever survives first contact with the enemy.” Circumstances change and plans should be altered accordingly.
- Maintain Good Supplier Relationships
Procurement savings is sometimes viewed as merely selecting the highest quality items for the lowest price. In this view, it is a zero sum game where one side, either the purchaser or vendor, wins at the other’s expense. But while procurement managers aim to acquire high-quality goods at the lowest price, relationships with suppliers do not have to be adversarial.
Procurement managers do not need to bully their suppliers to get results. In fact, doing so is counter-productive and unsustainable. Treating suppliers as collaborators is both more sustainable and profitable and may turn them into one of the company’s greatest assets.
With this in mind, procurement managers should devote some time to nurturing a relationship with suppliers by treating them with courtesy, honesty and fairness. Trust is gained between parties through honest communication, listening to each other, and involving one another in the decision process. Creating this trusting relationship with suppliers can create partnerships with a vested interest in seeing your company succeed. Done right, it’s a win-win for everyone.
- Setting Up Processes
Procurement is often handled in small and medium-sized businesses (and even some large ones) as an afterthought with no official procedures in place. In these situations, procurement consists of items being purchased on a credit card, documentation existing in the form of various emails, and purchase orders not being used.
It is extremely difficult to realize negotiated savings in these conditions. Procurement managers can achieve savings by putting in certain official processes to gain oversight. Some standard steps include putting in processes to handle:
- Identification of requirement
- Purchase request authorization
- Identification of suppliers
- Inquiries to suppliers
- Invoice recording
It should be noted this is a bare-bones outline of what should be included and is, by no means, a complete list.
With the processes outlined and established, appropriate technology can be put in place and employees hired and trained to support them. With clear documentation, procurement managers gain insight into what is and what is not working and can identify potential costs savings and waste. With this hard data in hand, it’s also possible to gain leverage in negotiations with suppliers.
The old saying is “A penny saved is a penny earned,” and this is definitely true in realizing negotiated savings. By following these three steps, procurement can be transformed from being a necessary business function to a true asset and competitive advantage.