Prime Advantage Blog

Are you Tracking your Procurement Savings?

Mike McDonald on Feb 11, 2016 1:17:03 PM

Before you can address any problem in business, you first have to know it exists. One of the most essential spotlight shining tools that successful supply chain managers possess is their spend data. Knowing where the budget is going, and examining the appropriate purchase information to determine how you are performing, is a key component to assessing the issue.

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Smaller companies are sometimes less sophisticated and usually do not have multi-tiered ERP systems. They manage their operations through homegrown methods and do much of their data collection and analysis through Excel. Using this type of system makes it difficult to decipher if your approach has become ineffective and calls for an upgrade to a technology solution.

Prime Advantage recently completed its annual CFO Survey, and 49% of Member companies reported that they feel they are doing an above average job of tracking their indirect spend. This is usually the area that can cause the most problems in a company by people "going rogue" and using unapproved vendors, or just spending without current vendor consideration. Controlling operational costs can also have a large impact, as the survey again showed this as a top concern for most manufacturers.

A technology implementation is a large undertaking, both financially, and in the number of man-hours it takes to investigate a solution and implement the change. According to the survey, the number one reason manufacturers gave for not implementing a solution is that they don't feel they will receive enough value in exchange for the time and money that will be spent. Most companies don't realize that the time they are wasting double-entering data in multiple places creates errors and missing information that sorely damages their cost savings.

Once you are accurately measuring your activity and performance in relation to the budget and other metrics, the next step is deciding what to do with the savings. Many companies seek operational savings but then don't have a solid policy in place on what to do with them once they happen. When procurement finds the right product at a reduced cost, another department will often take those savings and put it toward something else. If that wasn't the original intention of the strategy, it could negate all of the efforts to find those cost savings that were identified in the plan.

Some companies strategize according to the number of items in a project or its scope, instead of placing a dollar value in the budget. This keeps the eye on the prize of finding and benefiting from reduced costs when they occur. When savings are found, a larger decision should be made on where to apply them. Do we move up other projects? Spend in other areas? Or do we bring the savings to the bottom line as the project originally intended?

Procurement professionals work hard with vendors to find ways to partner and find solutions. Squandering the savings found because of inefficient tracking, and departments absorbing the money will only make the whole process seem for not.

2016 CFO Survey

Topics: Procurement, Analytics and Technology

Mike McDonald

Posted by Mike McDonald

Mike is the Executive Vice President of Business Development for Prime Advantage, a Chicago based Group Purchasing Organization for mid-market manufacturers. Responsibilities include managing business development, marketing, and the GPO's Healthcare Cost Containment program. He’s been a featured speaker, published author, and recognized award winner within the supply chain community.

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