Savings: most profitable procurement objective or not?
Looking at the bigger picture can be something of a head office cliché for a lot of large corporations. In practice, however, particularly when devising a global strategy that needs to be applied locally, it is the detail which reveals the greater value. Nowhere is this truer than in the thankless task often faced by Central Procurement who’ve been targeted to find efficiencies and drive down costs in a spend category.
The real opportunity often lies a layer or two beneath the price, and it is sometimes only those who work in each locality, day in day out, who have the expertise and access to the information needed to make strategic decisions.
Is procurement a cost or a cost saver?
In some instances, the global strategy, which looks great as a ‘bigger picture’ bottom line adjustment, can end up increasing costs when applied in the real world. Consider this real-life example that we came across recently from an internationally known brand.
This corporation’s Central Procurement team identified that standardising to a few centrally sourced suppliers for their cardboard merchandising displays would represent a 30% saving in Europe. On paper, the decision seemed an easy one, the deals were hastily done, contracts signed, and the new directives were shared with each local market around the continent.
Soon afterwards a number of local offices flagged up operational concerns, primarily relating to slower delivery and increased logistical costs. Although the top line cost of displays had reduced, in practice, the overall costs were higher than the existing arrangements, and to make matters worse, critical delivery dates were being missed, slowing down co-packing during a critical period. To highlight the ‘bigger picture,’ one of the company’s major European locations shared some specific observations!
30% savings cost twice as much trouble:
The team from this office put forward their case as follows, comparing their existing system with the new directive:
- Fast, more responsive and more flexible – often saving projects falling behind schedule by days
- Able to offer bespoke design and adjustments ‘locally’ necessary to make the products work better
- Local production and a longstanding, trust-based relationship (within 20 miles of the site)
- Delivery was lower cost and executed seamlessly (which was critical for co-packaged products)
Not only would the cost of using the central solution have been higher (when adding the delivery fees), the opportunity cost and lost time would have represented a significant disadvantage to the business, operationally.
More strategy and less procurement!
For central procurement to improve category performance at a regional or global level, those involved must combine procurement excellence with category expertise and a strong communication strategy with local markets, or a leadership position in that category cannot be achieved. Once a strategy is ready to be rolled-out, ensure there is a technology in place that makes it simple for local markets to engage – particularly for those complex spend categories such as Capex, marketing, and manufacturing equipment. Managing these problems is the only solution, as this would free Central Procurement’s functions to focus on procurement strategy rather than supporting transactional purchasing activities.
When you manage the complexity effectively, the application of strategy becomes simple. Tools, like Geneus, create time and space for Central Procurement teams to step away from the detail, master the category that they are managing and unlock the true value for the business. Instead of simply looking at savings on a spreadsheet, they will be able to prove genuine bottom line value at both central and local levels throughout the business.