CATEGORIES

Unlocking hidden profits with technology

Procurement and technology do mix!

By Tony Lego

Lowering supply cost can be a daunting task for organizations even if its operations are lean and mean. The cost of operating a company continues to rise while getting new customers is harder than ever. Add to this the cost of providingemployee benefits, which are also rising, and it is becoming more difficult to operate a financially healthy business.

But you can increase profits by reducing the costs associated with expenses and overhead by cutting supply cost or reducing HR cost. Reducing supply cost can be an arduous and time-consuming assignment. A supply program running at peak efficiency requires time, knowledge, resources, and dedication. However, by focusing on what is most within your control, you can achieve substantial savings.

Reducing through technology

Several ways to use technology to address the issue of supply cost reduction include Internet shopping, inventory control systems, RFQ systems, spend aggregation/management systems, and hiring a purchasing partner.

Internet shopping: The Internet brings the supply industry to the desktop. It can be a great source for product research and pricing, but can become time-consuming if shopping time is not structured. Internet purchasing saves money by eliminating overhead such as warehousing, sales representatives, advertising, etc., and in turn the savings are passed along to the consumer.

In many situations, you deal directly with the manufacturer or an authorized distributor, but use caution when using the Internet as some of those great-looking sites may be out of someone’s garage. Orders should only be placed from trusted sites and never send personal information, such as your Social Security number, bank account numbers, or credit card numbers, over the Internet if you are not absolutely certain the vendor is legitimate or if the website is secure. Many websites display a SSL (secure socket layer) logo at the bottom of the landing page as their assurance you are on a secure site.

Inventory control system: Inventory control systems can be as simple as a pencil and pad of paper, Microsoft Excel worksheet, or more robust systems using software and bar code scanners.

In electronic inventory systems, re-order point inventory levels can be set to trigger re-ordering, and minimum and maximum inventory levels can determine reorder quantities. This reduces necessary stocking levels and minimizes unnecessary ordering of supply items, which translates into a more effective and efficient supply system—giving you greater control over where supply dollars are spent.

Ask your distributor representative if they have such a system available for your use. Some distributors will supply a basic system for little or no cost if you ask.

RFQ system: RFQs (request for quotes) are used to determine the best price for the same or similar item from different manufacturers/suppliers. There are providers that offer the capability to conduct RFQs via the Internet, which saves you time in administering the RFQ process. Some provide ways to rate each suppliers bid on various factors such as capacity, quality, product offering, flexibility, and terms. This helps you quickly hone in on the supplier that will be the best fit.

Before creating the RFQ, you need to know what you want in the product (specifications, tolerances, performance levels) to meet your application of the product. This is very critical to obtaining the right product at the best possible price, and can save a considerable amount of time in product selection.

If you are unsure of the product specification or capability required to perform the intended application, you can invite suppliers to educate you as to why their product/service is best suited for your needs. But beware—getting three bids is not the end of the procurement/strategic sourcing process, it is the beginning. This assumes that you have selected the correct/best suppliers and defined your requirements accurately.

Spend aggregation/management systems: Many businesses that start out small and grow into sizeable organizations with multiple locations usually are missing a way to aggregate their spending across items and services. These companies have hundreds of supply items and overhead items, and the “spends” quickly grow when you look at your spending at a category level.

For example: A telecommunications company with three locations and 20 associates at each with 10 telephone lines and 10 people using the Internet per location. If you look at this at a location level, they are only spending a couple hundred dollars per month. Not a really big dollar cost. But if you aggregate the spending on this across the locations, now you are talking in the $1,000 plus per month. You can see how expense items/services can quickly add up.

There are many systems and solutions in the marketplace to help you accomplish this, such as Google Spend Aggregation. But before you take this route, make sure you are ready to do what is necessary to categorize your purchases into the correct/accurate categories, and keep them maintained as you move forward.

Hiring purchasing partners: Business has become more complex, offering a variety of products/services under one roof, largely in response to customer demands. The result is that direct materials purchasing consumes a vast majority of the purchasing organizations time and effort. This complexity now requires a greater range of skills and knowledge to navigate a sea of suppliers and products/service to get to the best value, and usually comes with a reduced focus on indirect expense items/services, which should not be the focus of limited purchasing resources.

However, the indirect area of purchases can and has produced significant savings for businesses. The issue here is, “Are the savings significant enough to justify hiring a staff of full-time procurement experts?”

In response to this need, several organizations offer purchasing expertise and technologies on an as-needed basis to help businesses maximize value and harvest savings in the indirect expense area. These technologies include price benchmark and supplier databases, which help the partner to quickly identify opportunities in your indirect expenses. They also deploy advanced negotiation techniques using Web-based tools to ensure a competitive environment is created for your purchases.

Take control

Each of the previously mentioned points, when implemented, can help you take control of supply purchasing. Each action by itself will achieve positive results, but each also has a trade-off associated with it: time utilization, use of material resources, human resources that might be better utilized performing increased revenue activities, or importance of saving a few dollars relative to other matters.

Time and other valuable resources expended to save money may eliminate any savings at the expense of something else; in reality, it may actually cost you money. Businesses have always relied on purchasing departments with dedicated men and women who understand sourcing and negotiation practices to conduct product/service research, supply market/supplier research, and presenting RFQs or RFPs (request for proposals and other procurement techniques).

Unlike the person in customer service, sales, production, marketing, accounting, or new product development, the purchasing department is dedicated to knowing how to purchase. Purchasing partners and departments dedicated to a business’ bottom line provide a service that can yield significant savings with improved business efficiency.

Tony Lego is an entrepreneur and franchise owner of Expense Reduction Consulting (ERC). He can be contacted at 904-401-1235, TLego@ERCsaves.com, or through www.ERCsaves.com/TLego.


Leave a Reply