Wanted: Reduced Procurement Costs

The ISM’s latest procurement study shows that buyers want reduced costs—but don’t always know the best way to achieve those reductions

By Bridget McCrea

Image of Wanted: Reduced Procurement CostsLast year, the Institute for Supply Management (ISM) administered a survey to procurement and supply chain executives with the goal of learning which business priorities these professionals were focused on. Additionally, for each priority, the ISM asked about key underlying dimensions of each business concern. In Procurement and Sourcing: Moving From Tactical to Strategic, the ISM reports that buyers and supply chain managers are focused on three top priorities: improving cost reductions and savings (60% of respondents), growing revenues and profits (30%) and risk management (28%).

Jim Barnes, ISM services director, isn’t surprised that cost reductions topped survey respondents’ agendas. Naturally inclined to push for the best possible prices, terms and contracts, buyers are also going beyond just negotiating to align themselves with suppliers in the most strategic manner possible. “We’re seeing a shift in procurement,” says Barnes, “with buyers employing more strategic approaches to improving both pricing and supplier performance.”

Low expectations

Although improving cost reductions and savings is on the minds of a strong majority of respondents, most acknowledge that only incremental savings of 10%, or perhaps 20%, in some cases, is achievable.

And while more than 90% of respondents reportedly measure total savings as a percentage of spend, the ISM says a notable minority (25%) does not measure the savings derived from RFX processes (Request For Information [RFI], Request For Proposal [RFP], and/or Request For Quote [RFQ]), collaborative sourcing initiatives or other methods of controlling spend.

Image of Jim Barnes, ISM services director
“We’re seeing a shift in procurement,” says Jim Barnes, ISM services director, “with buyers employing more strategic approaches to improving both pricing and supplier performance.”
For those companies that use collaborative sourcing, sourcing services or an e-sourcing tool, the ISM found that approximately 40% expected 1% to 10% savings, and 20% expected 11% to 20% savings.

Success steps

According to Barnes, procurement professionals that want to make a real impact on cost in 2014 should focus on forming strategic relationships with key suppliers. “Not every supplier is going to be strategic,” he points out, noting that a thorough portfolio analysis will typically reveal which vendors require a more tactical approach (i.e., smaller, focused, less impactful plans that are part of an overall plan)—and which warrant strategic attention (larger, overall plans comprising several different tactics). Once identified, the latter should be treated as true strategic partners through ongoing information sharing that, in turn, results in benefits such as reduced costs and better contract terms.

“For these benefits to be achieved, there has to be a collaborative effort taking place between you and the supplier,” says Barnes. “Without that alignment, the buying environment will remain largely tactical.” Getting there requires a “letting go” of the old ways of handling procurement, says Barnes, which centered on keeping information close to the vest rather than sharing it with suppliers. “It’s about generating trust among trading partners,” he notes, “and then leveraging that trust to reduce costs in a very collaborative manner.”

As a starting point, Barnes tells buyers to strive for decentralization of procurement operations and to avoid using the type of common, in-house terminology employed by so many mid-sized to large organizations. On its own, this step can help break down the walls between a firm’s various buying organizations and also with outside business partners. “Organizing a common approach and centralizing functions like quality control,” says Barnes, “can help put your firm on the track to strategic procurement and further cost savings.”

11 Top-of-Mind Priorities for Buyers

According to the ISM survey, these 11 key points are keeping procurement and supply chain managers up at night right now:

  1. Improving Cost Reductions and Savings (60% of respondents)
  2. Revenue Growth and Profit Improvements (30%)
  3. Risk Management (28%)
  4. Procurement Transformation (23%)
  5. Supplier Performance and Sustainability Management (23%)
  6. Supplier Collaboration and Innovation (19%)
  7. More Spend Under Management (19%)
  8. Improve Working Capital (15%)
  9. Compliance with Customer Requirements (14%)
  10. Procurement Organizational Costs (9%)
  11. Improving the Strategic Nature of Trading Partner Relationships (9%)

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