Today I ask, “How are you to know that your procurement ‘cost saving’ initiative will not deliver to the bottom line?”
Regular readers of my blog will know that, recently, I wrote a series of articles on the reasons why, when many large organisations embark on centralised procurement initiatives with the promise of substantial savings, direct increases in profitability fail to materialize within the business units. The last article in the series, “16 Reasons why procurement cost-saving initiatives fail to deliver to the bottom line” was published on 17 November – an analysis of the views of 65 procurement professionals posted in a discussion at Procurement Professionals Group on LinkedIn.
The most frequent reason given for failure of cost savings initiatives was Procurement’s lack of understanding of the true costs. Cursory examination of further comments (now totalling 223, from 87 contributors) would suggest the leading reason is unchanged.
In the absence of a full understanding of the true costs, what questions should Procurement be asking?
The answer came up in the discussion. At this point I would like to thank Brian Leapman who provided both the inspiration for this blog, and six criteria. I have added another two criteria, which, with Brian’s six, are embodied in the following questions:
Will the business:
- Use less resource?
- Take less time?
- Perform less work?
- Reduce waste?
- Increase agility/flexibility?
- Create greater value?
- Improve (or at least not make worse) the risk/opportunity profile?
- Improve (or at least not make worse) the quality?
These questions relate to the business value chain and must therefore be asked of stakeholders who represent the relevant categories of value chain activities. (For more information see “How to Start a Strategic Value-Added Programme.”)
If the proposed change makes any of these criteria worse, then you most probably have to go to a greater level of granularity and detail between your present arrangement and the proposed offering. How much detail? In Brian ‘s words taken from the discussion,
“…in sufficient depth of detail depending on the change being proposed to identify whether it is an improvement or not against the above criteria.
“For instance if the two alternatives share an identical process at an identical cost (known or unknown) you do not need to add it into the cost of ownership as the effect is neutral. Only evaluate the factors that are different, as they will have a net effect on the cost of ownership.”
Related Articles:
16 Reasons why procurement cost-saving initiatives fail to deliver to the bottom line
How to Start a Strategic Value-Added Programme
10 Tips on the use of Value Chain Analysis for Procurement Strategy
7 Essential Elements of Stakeholder Engagement