Part 1 – Buyers Guide to Cost Savings
As a Buyer or Purchasing Professional you should be evaluating your spend. What does this involve and how does it benefit my organization to complete a spend analysis? Basically, you are reviewing how your organization spends its operating budget or what makes up costs. To do this, one could run a historical report from your purchasing software system. It might allow you to drill down and report the top 20 or 30 vendors and how much money your company spent with them in the last 12 months. Better yet if it could provide the commodity or description of the spend then you are off to the races. If Purchasing cannot directly pull this data from a software program, your next best option is to approach the accounting department. They should be able to give you a list of the top vendors A/P sends payment to.
Once you have your list of the top 20% of your vendors in relation to how much money you spend with them annually we are fairly certain you are going to see that this list likely represents close to 80% of your operating budget. Yes the 80/20 rule will apply. Why focus on the top 20%, well there are only so many hours in the day and as a buyer you need to focus your efforts on where you are going to make the biggest impact. Spending hours on toilet paper contracts to save $10.00 might not be the best way of utilizing your time.
Cost conscious business owners will dedicate a large portion of their time analyzing this 80% spend and developing a spend analysis report is a vital piece of your procurement strategy. These are the vendors you are going to be able to make hay with.
1. First gather specifics on this spend as it is in the details. How many widgets am I buying from Vendor A in a 12 month period? This is defined as your annual usage or consumption.
Part of your analysis should be looking at the purpose and quality of this widget. Is there a better quality product which will reduce costs over the long run? What about competition? If you want to know if you are paying too much for goods or services the best way to achieve fair market pricing is to issue a RFQ. A request for quote to a list of qualified vendors will tell you everything you need to know about current market pricing and conditions. To do this the spend analysis report you just completed now comes into play. In your RFQ it is pretty important to include anticipated usage for the product your are tendering. Knowing the anticipated volume allows the vendor to price it accordingly. The specification, quantity … you know the drill. The right goods for the right price is the purchasing departments motto.
So your spend analysis report has identified 20 vendors and the commodities they sell you.
Item A – might be electricity or power if you are a manufacturer. This one might be a team approach — Engineering, Operations, Procurement and will involve plenty of technical analysis and might be what we call a captive vendor. Maybe your rates are set by government or you are classified and there is no negotiation so lets move onto something we can tender.
Item B on the report might be Metal Widgets and it is an item which can be tendered to several quality suppliers.
2. Before creating a RFQ, you should do your homework and pre-qualify vendors for these items. Ensure goods are of a similar quality by asking for samples from vendors and getting approvals from your user departments. Get an idea of origin or where goods are made, stocked and where they will be delivered from. No use getting something for less than what you are presently paying if the supplier cannot deliver.
As part of your tender you can request firm pricing for the next 12 month period. In exchange for this commitment, you are asking for preferential pricing. This does two things, firms up your costs for the next 12 months and it gives the vendor comfort knowing they have your business for the next 12 months. By granting them a contract for the next year, the understanding would be the supplier would guarantee they stock enough inventory in their local branch which would then allow you to cut back your on-hand inventory. You are then able to reduce your carrying cost and hopefully reduced item unit costs.
Competition or issuing a RFQ to determine present market pricing is the preferred way of doing business. It is an open door, above board process and begins to condition your suppliers that you intend on watching your spend and are focused on ensuring you are receiving the best possible product at the best possible price.
We hope we have managed to explain why you need to target these major spend areas and how a spend analysis report can be useful in helping you put a purchasing strategy into place.
If creating a RFQ is now on your radar, there are many sample RFQ templates available on-line to help you get started. We also provide sample RFQ and RFP Templates which are available in our Mega and Purchasing Managers Bundles and will help you create them quickly and efficiently. Here is to your success!