Three questions for assessing procurement departments and the practices it uses to reduce costs in your supply chain.
By Reid Nahm & Brian Thorngate
Making steady and continuous improvements to purchasing department skillsets is never easy. Leader organizations have well defined requirements, reliable data analytics, accurate demand planning and an engaged supplier network. They are also prepared for new supply chain challenges like inventory positioning, specialized components, logistics bottlenecks, and intensifying trade wars.
“Old school” supply chain management rules dictated that cost validation can be accomplished by soliciting three quotes from qualified suppliers and either going with the lowest total cost quote or negotiating down to the lowest quoted cost. With the advent of directed strategic commodity spend and the need to address more ground with fewer resources, leading procurement organizations are today rewriting the time-honored “three quote” technique.
So, in this “new-game” of supply chain management, Impendi is often asked: How can a leader be sure that their team is using best practices to optimize cost? In other words, how do you know that you are getting a good deal?
Although there are many methods for procurement assessment, we suggest that clients begin with these questions.
1. When was the last time a spend category was systematically scrutinized for compliance?
Large organizations are especially susceptible to spend leakage, meaning that a divergence exists between approved contracts and the spend that your organization endures from suppliers. Procurement departments should regularly be conducting root cause analysis to identify sources of leakage.
When investigating leakage, good purchasing teams are asking: Are we confident that there have been no price increases since the last contract with the vendor? Do invoices match the price tables in contracts? Is the organization eligible for discounts or special terms that have not been credited?
2. Have disruptors able to create a truly competitive bid environment been introduced in the last two years?
Often there is a bias within a rapidly changing business landscape for purchasing professionals or operating department managers to stick with the status quo. It is tempting to fall back upon the comfort of known suppliers and relationships. Organizational “fear of failure” can also create a resistance to change. Entrenched suppliers recognize procurement complacency and are happy to accept not being held to a competitive market standard.
3. How are freight, logistics, and handling costs accounted for in vendor invoices?
Best practice purchasing departments are always on the lookout for hidden fees within freight, logistics, and handling. Often these costs are supplemental quoted costs that hit your invoice. Leader procurement organizations also scrutinize how accessorial charges are accounted for during invoicing.
Assessing your procurement team’s responses to the above questions should give you good insight into whether you are getting the best deal. If you would like assistance, Impendi has unique insights into the ‘new-game’ in procurement and is prepared to help you assess the maturity of your internal procurement practices.
Impendi has unique insights into the ‘new-game’ in procurement and is already assisting clients to write new rules at their organizations. Our engagement leaders bring deep category expertise, extensive industry operating experience, and learning from hundreds of client engagements to ensure that opportunities to extract value from the supply chain are ones clients ‘can take to the bank’.
Impendi is prepared to serve as a force multiplier helping to speed your organization’s development of a best-practice strategic sourcing function. Contact us today about an exploratory conversation.