Procurement managers have the authority to decide on company purchases, so it’s important that they have good financial acumen. With a solid financial knowledge base, procurement managers understand the financial implications of their procurement decisions and will ensure that these decisions optimize company resources and meet business requirements. Cost efficiency and reduction have long been the main concerns of procurement managers everywhere, and with good financial skills, they will be well-equipped to manoeuvre the twists and turns of procurement management. Here, we take a look at basic finance best practices that every procurement manager should know.
Focus on total cost of ownership (TCO), not price
As a procurement manager, one of your main concerns would be how to achieve cost reductions across the procurement cycle. In fact, according to Deloitte’s 2016 Global Chief Procurement Officer (CPO) Study, 74% of CPOs are citing cost reduction as a strong business priority for the upcoming 12 months. One of the best ways to be cost-effective is to emphasise the importance of total cost of ownership. For example, instead of selecting a supplier solely based on price, established organisations are increasingly considering many other factors that affect the total cost of ownership such as training, maintenance, warehousing and transportation costs, as well as environmental practices and product quality. In fact, it was found that acquisition costs only account for 25-40% of the total cost for most products and services. Identifying the total cost of ownership requires the buyer and supplier to look at the entire procurement process and decide how to drive cost reductions together. Having a ‘total cost of ownership’ point of view should be the goal of every business, and it’s up to the procurement manager to influence management to embrace and internalise this mindset across the organisation.
Review existing contracts for price competitiveness
Long-standing contracts may have served your company well over the years and brought good business to the supplier, but there may be significant cost reductions to be gained from reviewing these contracts. Ideally, a procurement contract should be evaluated every five years to ensure that the terms and conditions are still viable and profitable for both the supplier and the buyer. It’s possible to derive cost savings from long-term contracts as the many factors that made the contract worthwhile at the time may be very different now. Market conditions and economic situations are always fluctuating so it’s important to review the pricing of the products and services to reflect current circumstances. Also, consumption patterns can vary widely in the space of five years so it helps to determine whether the level of demand for the product or service has changed. The stability of a country’s currency also plays a big part in procurement contracts, and the onus lies with the procurement manager to review the feasibility of the pricing based on the strength of the currency at present. All these considerations will broaden the path for renegotiations to secure more value-add and cost savings for both parties.
Challenge supply chain costs
As a procurement manager, your role is to watch every aspect of the procurement cycle closely to mitigate financial risks and minimise wastage. One way to do so is to ensure that you are privy to every step in the supply chain. Upon procuring the products or services from a supplier, it’s important to map out the supply chain to determine the costs incurred at every stage. Issues such as high packaging and delivery costs can be managed by negotiating for a fair price with the supplier. To sweeten the deal, consider offering carrots such as buying in bulk and providing early or on-time payments for every shipment. You could discuss with your suppliers on receiving discounts or rebates when you increase order amounts, or even when you alter purchasing patterns in their favour, e.g. ordering products for the following month two weeks in advance helps suppliers to better plan their delivery schedule, leading to higher cost savings. They can then transfer some of the savings to you, creating a win-win situation. Also remember to select effective and efficient modes of transport to ensure that the purchases arrive on time and in good condition. Having an efficient mode of transport also helps in the event of emergency procurements. Proper procurement planning and a sound understanding of the supply chain cycle help to bolster cost reductions and ensure a problem-free procurement cycle.
Remove suppliers who are a liability
A big part of procurement costs stems from payments to suppliers, so this is an area where you can glean some cost savings. Good procurement management entails knowing where your money goes, which means knowing who your suppliers are and how they are performing. If you have suppliers who always make late deliveries and neglect to inform you beforehand, you may want to consider axing them from your list of suppliers. Late deliveries make for unhappy customers, consequently affecting your company finances negatively. By reducing the number of suppliers on your list and only retaining the services of those that are reliable, you not only ensure that the procurement cycle runs smoothly, but load up on savings as well. It would also help to review the terms and conditions of the contract between you and your suppliers. In some cases, competitive tendering can also be used to secure new and competitive suppliers, while single sourcing is useful to achieve economies of scale. It helps to review the existing sourcing policy and make the necessary changes upon carrying out a cost benefit analysis.
It goes without say that procurement managers play a vital role for a business. For relevant articles, head on over to ThunderQuote
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