Lack of involvement costs billions in missed savings

29 March 2006
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30 March 2006 | Rebecca Ellinor

Procurement is leaving billions of pounds on the table each year by failing to identify opportunities for savings, research has found.

The 2006 Global Spend Agenda of purchasing chiefs in Europe and the US found two types of procurement departments: those that are happy with the status quo and those that are not.

The former are missing out on substantial savings because they are not involved in enough areas of spend, it said.

This is the fourth year the Ariba study has been conducted but it is the first time US executives have been included.

A total of 325 purchasing heads from large organisations in Europe and the US were quizzed by research company Loudhouse for the review.

Adrian Done, a doctoral fellow at the London Business School (LBS) who led the analysis of the results, told SM: "We can see the emergence of two groups of companies: one takes a rather conservative, traditional 'bookkeeper' approach while others are more bullish in their enthusiasm for innovation and aggressive cost-reduction targets.

"The bookkeepers are lagging because they don't have the strategic drive to know where they're going or how to get there."

They know bigger savings are possible, Done explained, but they are not imaginative or brave enough to go for them or they are not equipped to.

"Purchasing has to be innovative in structure and strategy so it can really grapple with complex spend categories, off-contract spend and compliance issues."

The survey found 91 per cent of businesses are trying to reduce the cost of goods and services, with a third of those questioned looking for "aggressive" savings of more than 10 per cent.

One area that has seen improvement in the past 12 months is spend visibility. In 2005 more than 70 per cent were unable to specify savings targets.This year, it is only 30 per cent as purchasing chiefs gain access to better information.

Problems remain in the areas of compliance and maverick spending. Almost two-thirds (59 per cent) of suppliers work outside negotiated contracts and rogue spending occurs in 77 per cent of businesses in Europe and 81 per cent in the US.

The study also found procurement departments are still trying to reduce their supply base and still struggle with more complex spend areas such as services.

The results of the survey were analysed by academics at the LBS. Ariba will publish the study on 5 April.

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