Webinar

Autumn 2011

In August CPO Agenda and Capgemini ran a webinar,  “Strategic Sourcing – Quick wins to boost this year’s savings total”. The 500 delegates heard presentations from a panel of leading CPOs and a Q&A session chaired by CPO Agenda editor, Steve Bagshaw. 

Here, we present the event highlights.

In association with:

Presentations

Larry Beard
Business transformation, Tate & Lyle
There are four elements to cost: price; specification; process; volume.

Price
One area to consider is any contracts due to expire at this point in time or at the end of the year. People are developing budgets for next year so approach the suppliers and say: “If I extend the contract for another year, what is it worth to you?” There will be an immediate willingness to negotiate. Also, look at the spend of your suppliers from this year versus last year. I’m confident that in your top 100 suppliers there will be at least half a dozen where you will be surprised about how much you are spending with, this year versus last.  Have another conversation with them in relation to some form of rebate or other commercial terms.

On rebates, there’s always a painful exercise where the suppliers forget or don’t want to pass on the rebates, so having a focused piece of work just around collection always delivers results.

E-auctions seem to have gone out of favour, but I’m a big fan. How many suppliers do you need? I’ve seen it run successfully with one supplier. Areas to target on price include copier paper, toner cartridges and so on. Print is another nice easy quick one.

Specification
Purchasing needs to be able to challenge the specifier. De-specify what you have got, especially around services. For example, with cleaning, if people empty your bins every day you might want to go to every other day.

Process
Part of that is understanding which elements are the cost drivers. Challenge the suppliers by asking them: “How can I get 10 per cent off my cost immediately” and get them to come up with ideas.

Another thing to consider when you look at the supply chain is collection instead of delivered price. There is risk attached when you go from FOB to CIF. If it’s in the UK the risk is minimal. But you do need to better understand your delivered cost elements.

If you have a P card, use it. You should have a rebate attached and you will be amazed how much spend you can push through your P card.

Volume
One thing you could introduce is some sort of choke – by choke I mean that any orders over x value get challenged. What usually happens is that people will think twice about some volume purchases. This is also the time to send the message out that you do not need to spend all your budget.


Jürgen Friederici
Senior vice president procurement indirect materials, Hilti

To do what Larry sets out requires a good foundation in the business. We have worked on that by aligning our targets with the organisation’s. Our organisational targets are growth, differentiation, productivity and people. To reflect those in our department we created four pillars: people and organisation; material group strategies and projects; controlling; processes and tools.

People and organisation was a key step for us. The standard of procurement we have seen over the last decade has not been what we needed. We wanted skilled, strategic people who can look into the material groups and then be able to lead across the organisation. You have to have a person that has the experience and know-how, but also emotional intelligence to structure and lead the organisation. You have to have a person that can take input from the CFO but then walk into the organisation to make it happen. The right person for that position is key to achieve quick savings.

Although we are in difficult economic times, get the talents on board to tackle this now. If you don’t have the people in place it will be impossible to drive savings in the future.


Ian Russell
Head of procurement, SAB

Practically, when you are halfway through the year there is no time for starting new things. You have got to focus on three levers to make a difference:

Demand management
It’s all about stopping the spend in the first place. You have to understand why people are spending the money they do. You must also stay away from things that the business would regard as revenue generating or which people would see as building for the future. Focus on horizontal budget lines for discretionary spend (consultancy, travel, stationery) that go across all business units, since it’s much easier to identify opportunities that way. Create linear ‘burn rates’ on each of those horizontal lines. You can understand how much they burn month by month, what the trend is for the year and whether there they are spending unused budget inappropriately and quickly in order not to lose it next year. 

Larry mentioned choke. To manage it, put an extra workflow setting in your ERP solution. Make the CPO sign everything off over a certain amount of money. It’s amazing how quickly that can suppress demand. Finally, become finance’s best friend and jointly use the insights gained into the budgets through this process to make sure you can repeat them the following year.

Supplier leverage
Mid-year, it’s too late in the year for big sourcing exercises. So you can either take the sourcing activities in sight and make them go harder, deeper and faster or focus on the short term stuff, assuming the longer–term stuff will carry on running in the background.

A crucial prerequisite for any form of supplier leverage tactics is to understand your supply base in the future. Tackle the stuff that’s non-core to your business while making sure you focus ruthlessly on the areas that you can take cost out.

Another area is understanding how you can defer specific line items or parts of expenditure into the next fiscal period. You have to manage yourself within the international financial regulations. But there are many ways of deferring spend.

Get aggressive with the suppliers, asking why do we buy what we buy? Do we need 500 minute cell phone tariffs as opposed to 200? We must be aggressive, but we must be fair and show integrity. 

Financial engineering
This is about working with finance and your suppliers to understand what tools you have to smooth the impact of spend in a current fiscal period. Within the IFRS, simple things to look at include understanding depreciation periods on capital equipment assets and the opportunity to re-baseline these; looking at capitalising key change/IT/infrastructure projects to lessen opex impact of the activities; and focusing on understanding what you can do with fee structures, maintenance agreements, leases and so on to think about re-engineering and smoothing a payment curve into the following fiscal period.


Katarina Aspenberg
Senior consultant, Capgemini Procurement Services

If you want quick wins you need good tools. Even though you can identify savings opportunities, they may not be taken advantage of since the rest of the organisation is not aware of the correct processes. To capture spend, you need the right strategy and appropriate tools to empower your organisation. The two most common problems, which are the basis of maverick spend and poor contract management, are invisible or lost agreements and chaotic processes. Agreements need to be used to be effective. If you have a contract management tool you can expose your agreements, which creates compliance and in turn contract savings. The quick win here is that you can make sure you don’t miss out on volume discounts.

When it comes to chaotic processes, the experience can be that everyone takes the easy way out and no-one does the right thing. But if you have one channel for all spend there is control of all purchases and controlled approval processes and it will help to decrease maverick spend. Misaligned forecasting and misunderstanding of business needs can be solved by having a good e-procurement tool, where you regularly follow up on fluctuations in purchasing volume over time. This is especially important when the delivery times are long or the product is business critical.  

Q&A session

Panellists submitted questions during the hour-long session. Here are some:

Q: How many of the speakers have had experience of asking suppliers not to submit invoices in December? Do they still do that?

Larry: It would take a brave person to say that doesn’t go on anymore. I think it’s more prevalent in businesses these days to let the invoices come in, but delay payment. I’ve known businesses that write letters, which is dangerous because they could get into the public domain, saying please delay payment and we’ll do quid pro quo when its your financial year end. I would say it’s a dangerous thing to do.

Ian: Two things, first under the IFRS regulations you have got to be careful about the way in which you manage that process and second, all you’re doing is moving the problem from one year to another, so I feel it is a very limited tool.

Q: At the year-end, procurement goes ballistic with churning out PO’s. How does that sit with quick wins?

Ian: All organisations do see that and it is a genuine issue so we have got to understand what is creating that behaviour in the first place and what to do about it. One thing I did in a previous organisation was create an artificial year-end that was technically a month before our financial year-end closed. So no orders could actually practically be placed in the last four weeks of our trading period and it allowed our procurement department time to smooth that demand through a little bit.

Larry: It happens because there is demand from the business. Now is the time to set the scene on whatever approach you are going to adopt along with ideally at least the CFO’s agreement as far as controlling that budget spend.

Jürgen: We don’t budget anymore, but forecast three times a year. The business is forecasting spend on a 3-4 month basis so it can’t peak anymore. That means
we have smoothed out the year spend on indirect materials.

Q: We have a five per cent cost reduction target, but our executives continue to  spend like its going out of fashion. What do we do?

Larry: Your first challenge is that any target you want should be a joint objective, not just a purchasing objective. The second one is, where is purchasing aligned in the business? If it’s not aligned at exec level you are going to struggle. The third thing, there needs to be one-to-one conversations with some of the executives, but
do it in an informed way, by which I mean, look at how much they are spending
versus other execs to inject some sort of peer pressure.

Q: Given the controversy over P cards, how would you convince the CFO of the benefits of introducing or extending the use of these cards?

Larry: It’s usually the CFO or group audit people that are paranoid about the use of P cards. Generally, there are three controls that most businesses have: a transaction limit, a monthly limit and then some form of indemnity with the P card provider. As long as you take action with the individual, the P card provider will pay back any money that has been spent fraudulently by the employee. Of course what you need to wrap around all that is a very good well defined P card policy, but most businesses do not have that. It’s viewed as unimportant or secondary, but unless you have clear guidelines and expectations of
behaviour, your P card programme will fail.

Ian: As somebody who has worked for several banks and been part of the issuing operation, the transparency that you can actually get from spend that goes through a P card in terms of the back end MI is probably greater than you will get out of Oracle or SAP. So the actually visibility you should have of that spend certainly doesn’t diminish but if anything, in my view, probably increases. Create a clear understanding of the reports that you can get from the P card systems and use those in the right way within your organisation.

Q: Ian, you mentioned lowering the choke limit of invoices getting signed off. Can you give us any indication of the percentage reduction that you made or the amount of difference you made when you reduced the limit?

Ian: Yes the last time I did that was three or four years ago when I was CPO of Absa, the largest retail bank in South Africa, and we made a very significant dent. If I talk about discretionary spend, things like consultancy or travel so not operational spend, we made an indent in our last two months of our trading period of more than 15 percent so it was significant.

Q Larry, you mentioned an e-auction with the one supplier: how much did you reduce their best price by?

Larry: Twelve per cent. Needless to say they had no idea they weren’t up against anyone else and still don’t know up to this day. It was at a previous company.

Q How can I get control of indirect spend from the many budget holders that currently spend the company’s money?

Jürgen: For me, the best way is to partner with them and bring people to the table that can challenge them. It can be a long process, but once they have understood the benefit of procurement they will involve you and show you more and more of their spend. Although you may know the spend numbers yourself, of course, through the ERP system, to find out how it is going to be spent and for what you need to be sitting with them. I know the issues you may have with marketing, with IT or telecommunications and logistics, but we are now working with them in a true partnership. The right people at the table bring in the right ideas.

Larry: The first thing you need is spend data so you can start having meaningful conversations with your stakeholders, as Jurgen says. Without initial data, it’s going to be a very blunt conversation. The more global the business, the more challenging it is to get spend data and you need to capture invoice spend. There’s a whole chunk of spend still not going through the purchase order.

Q: Would you consider looking at new suppliers in this area, particularly of SMEs, to bring a fresh look at your requirements and innovation?
 
Jürgen: Absolutely. When it comes to moving solutions away from a company, outsourcing services in your organisation, you want to look at how you match your own company and spend with your partner. When you are small, potentially you don’t want to move to the bigger
companies in the market so you start with SME suppliers where you are a bigger fish in the pond. We even challenge large companies with small and medium newcomers on the market and get great results out of that.

Larry: Part of it is also about the purchasing maturity. It is not easy for SMEs to deal with large businesses. It’s not just in the public sector, anywhere its difficult. And, if anything, the purchasing department has got to be aware of that and put in processes and procedures and pro-actively want to do business with SMEs. It’s an enormous challenge for them to get through the door of some corporates, let alone do business with them, and then you can kill them with your corporate payment terms at the back end. But it’s definitely an area that every business should focus on.

Q: What is the biggest barrier to implementation of an e-sourcing tool and what are the steps you can take to overcome it?

Ian: Certainly in my environment in South Africa, the single biggest barrier is the readiness of the supplier base itself to be able to accept and adapt to the business practice and indeed the technology itself. In a country where bandwidth remains relatively scarce and poor, running
the event itself becomes a surprisingly challenging mission. It’s really just as straightforward as that.

Jürgen: You need to have an owner of it in your organisation. Also, you have to have delivered results over the past year so that the organisation trusts that what you are doing will deliver the respective results that you put into the business case.

E-procurement tools have been rejected before, but now we are two years in the process in a number of organisations.

With ownership, a good team behind it and with a reputation the organisation knows that the team has developed over the past year, it works.