Procurement professionals, who traditionally measure their effectiveness by savings, will sooner or later face the problem of depletion of suppliers' resources and loss of their motivation for further cooperation.
Suppliers cannot always be the sole source of benefits, patching holes in your company’s balance sheet with their funding.
Perhaps that is why the concept of strategic sourcing appeared, emphasising the early analysis of requirements to conduct negotiations with internal customers: on excessive volumes, pumped up specs and overstated expectations. These negotiations are much more time-consuming and nerve-draining than the ones with suppliers – here the opponent is usually heavyweight and charismatic, and can “blackmail” buyers with operational disruptions, loss of revenue or damage to the brand. Procurement needs to persuade and maneouvre using the tools of economics, psychology and internal politics.
Let us consider that the opportunities for strategic sourcing in your company are effectively utilised. What else can buyers offer their companies in terms of adding value?
Procurement frontrunners will participate in product development, conduct deep supply chain analysis, audit and optimize business models and production processes of strategic suppliers, etc. Read the "Disruptive procurement: Reinventing and Transforming Procurement Function" by AT Kearney's team of authors and you will realize how far is the horizon of procurement excellence.
However, there are some reasonably simple solutions to start adding value today:
1. Effective use of savings
Where are the millions of procurement savings claimed each year? Usually, nowhere. Accounting and classification of it may be incorrect, and savings in future periods are mixed with the results of the current fiscal year. The value of savings can be calculated from the supplier's first offer. Monitoring of actual consumption versus the RFx forecast may be absent. Finally, the savings might get spent on unplanned needs – the available budget needs to be utilized in full.
It is proposed to introduce several basic principles of savings management:
• Savings is measured against the budget
• There’s a distinct bucket of savings applicable to the current fiscal year (“cash” savings)
• Reporting is approved by financial control
• Benefit realisation is monitored on the basis of actual consumption (not forecasts!)
• Approved savings of the current fiscal year is deducted from a respective business unit’s budget
Thus, a real effect is achieved on the financial performance of the company and so procurement efforts are being materialized.
2. Supplier Innovations
Supplier relationship provide a unique resource - knowledge, experience and creativity of suppliers to be used for the benefit of your company, for example:
• Recommendations on quality improvement and cost reduction in the supply chain and product lifecycle
• Synchronization of roadmaps between your company and the supplier, so that their innovations immediately contribute to your product
• Business consulting, which suppliers are ready to provide free of charge or at a minimum rate to help your company optimize the business model, production process, marketing strategy, etc
After all, the supplier, like no other, is interested in your success.
3. New revenues
Your supplier base is a bonus pool of potential customers. Most likely, they consume something similar to the produce of your company, and, perhaps, are served by your competitors. Of course, attaching suppliers to your products will not be easy, especially if your competitors are their customers, as well. But to get at least portion of the supplier's budget is quite realistic. Supplier’s commitment to purchase your company's produce should become a standard element of the negotiation strategy. In general, the mentality of buyers should be constantly tuned to not only cutting costs, but also to generating new revenues.
The ways of transforming cost into revenue are specific to a company, market, industry etc., so let’s provide just a few practical examples from the aviation industry:
• Outsourcing of inflight magazine, that resulted in substitution of production cost with an advertising revenue share
• Renegotiation of an agreement with the travel agency to obtain a revenue share from online visa issuance to passengers. Previously, all revenues remained with the agency
• A variety of trade-in programs with manufacturers of computers and mobile terminals
• Sale of reusable or recyclable packaging, return of accessories and certain consumables in exchange for a credit note
• Yard sale of retired onboard products (dishes, cutlery, linens and blankets etc.) to the suppliers and staff
• An open auction for the sale of corporate vehicles having reached the maximum mileage
4. Offloading balance sheet
Obsolete and faulty equipment, not allocated marketing materials, stands from past exhibitions, materials with an old brand - all these are tons of dead weight and millions of dollars on the balance sheet of the company. Identifying them, sorting by usability, determining the book value, preparing for sale or disposal - this is an incredibly complicated process that few people want to deal with. Procurement and supply management would elect to offload the company’s balance sheet, optimize warehouse space and associated costs, obtain additional revenue through the sale of potentially useful assets.
The financial benefit of this process sometimes exceeds traditional procurement savings.
You can barter any product or service produced or consumed by your company to eliminate sales, distribution or marketing overheads, and, most importantly, save cash. You can grow the client base, sell off dead stocks or reduce bad debts.
You can also employ specialist companies offering e.g. air tickets, hotel rooms, advertising assets etc., in exchange for barter currency.
You can use barter a tool to attract new revenues and offload balance sheet, as described above.
6. Marketing cooperation
Any large company has significant marketing assets, for example, a website and social networks, regional offices or points of sale, even a fleet of vehicles. The key component is the clientele, thoroughly studied and classified. Marketing assets can be offered to suppliers for advertising, brand promotion and targeted campaigns in exchange for revenues, discounts or similar assets to promote your own brand.
For example, having a large fleet, the company can conclude an agreement with the automaker and lease cars of its brand with a significant discount, as they will be part of the marketing program. In the airline industry, manufacturers are willing to pay airlines for the opportunity to serve their products (beverages, snacks and cosmetics) or branded napkins and cups to the passengers. You can co-brand a small outsourced warehouse or sell the name of a metro station, stadium or aircraft - the possibilities of marketing cooperation are truly limitless.
7. Preferential buying
All over the world, there are programs to support small private entrepreneurs, war veterans, local crafts etc., and this is a social obligation not only of the state, but also of large companies. You can factor preferences in the tender evaluation, for example, by allocating 10-20% of the commercial rating to it. Thus, your company will realize its social responsibility and improve its public image.
Suppliers who are customers or marketing partners of your company and generate significant revenues can also receive certain preferences. Undoubtedly, your long-term strategic partners should enjoy some recognition in regular tenders - the main thing is that it is not based on a subjective assessment of an internal requestor, but clearly reflected in the tender evaluation.
8. Additional staff motivation
Procurement can provide additional tools to motivate staff. For example, corporate travel discounts on air tickets and hotels can be extended to private travel of company personnel and their families. Your suppliers can provide offers to your staff or set up a temporary sales point in your office.
In some companies, there are sections of a corporate website with special offers from suppliers, and discount cards are issued. The staff discount program is specified in the employment contract, as one of the benefits provided to employees.
The above examples are meant to demonstrate that procurement can add value not only by traditional price negotiations. The revenue increases, the image of the company improves, relationship with suppliers is strengthened, the brand is promoted - all thanks to the comprehensive professionalism of the buyers.
☛ Sergii Dovgalenko is head of procurement – corporate services procurement & supply management at Etihad Airways.
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