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Ramon Saravia shares an always useful post on how to improve the bottom line by reducing purchasing costs. 

In many companies, the purchasing area is only seen as a transactional function, attached to the routine . In these companies, purchasing is just another function to acquire what is necessary for the company’s operations. Typically, one, two, or three quotes are requested for each order for products or services, and the area chooses the supplier with the lowest price.

This brings a loss of value to companies, mainly due to:

(A) More expensive prices: even when there are eventually some price agreements, many companies do not properly leverage their purchasing power for the main categories – mainly because of the dispersion of purchases among several suppliers, the lack of contracts, or the negotiated contracts inappropriately.

(B) More costly operating model: due to inadequate processes, organization, technologies and/or metrics, for many companies the purchasing area ends up being inefficient – ​​to carry out the same volume of operations, a greater effort is needed (e.g., it is a larger team of people, etc.), consequently translating into an also higher operating cost.

To solve the first of the questions, (A) more expensive prices, the company must review its purchasing strategy:

First, it must perform a purchase analysis and diagnosis: this evaluation includes everything from the analysis of the purchase history, the categorization of purchases, the elimination of non-addressable categories (ex.: JV, contractual agreements, etc.), to the segmentation and prioritization of purchasing categories. At this stage, the action plan and cost reduction estimates by category for the short, medium and long term are also prepared.

Second, the company needs to implement the opportunities identified (in the previous step) : this step includes everything from the detailing of internal purchasing and market information for each prioritized category, the identification of suppliers and negotiation of proposals, to the initial delivery of the expected savings.

To solve the second of the questions, (B) more costly operating model , the company needs to review each of the 4 pillars of the operating model (processes, organization, technology and metrics) , develop them and align them correctly.A company can negotiate a number of very good contracts, but without clearly defined mechanisms for managing and measuring performance, contracts will struggle to achieve the benefits initially estimated. Similarly, purchasing technology can provide all the information executives need to make informed purchasing decisions, but this capability is meaningless if the organization has not well-defined decision rights that identify who decides and who will be responsible for your results. In other words, to ensure adequate and consistent capture of the gains identified in the new purchasing strategy, it is critical to adjust the operating model.

Read the full post, Strategy, Implementation, Results, on Ramonsaravia.blogspot.com.