Procurement Levers in Flextangle
Below is an explanation of all the procurement levers on the Procurement Flextangle – a paper toy that saves companies millions. To make your own Procurement Flextangle, you can download it here: http://acquireprocure.com/procurement-flextangle.
Demand management is about both critically questioning the relationship between the demand and the outcome required (eliminate demand, reduce quantity, simplify specifications, encourage substitution) as well as changing the attitude and culture of the organisation towards demand (tighter process and tracking, increase cost awareness).
Involves questioning whether the product or service is something that will have minimal impact should it not be provided anymore. This may apply to ancillary services (e.g. office ‘perks’), services made redundant due to technology, market or company changes (e.g. technology has enabled the elimination of printing in paperless working environments).
Involves questioning whether a reduction of quantity can achieve the outcome desired. A common example is the contracting of labour and equipment – are you currently paying for resources that you are not using to full capacity and therefore can ‘cut’?
The process of cutting back specifications to make it fit for purpose. A common example of this is identifying and cutting back the ‘gold-plated’ specs or the ‘bells and whistles’ that go over and above what the company really needs.
This is both the substitution for a lower cost similar good/service or the substitution for an entirely different good or service that can achieve the same outcome desired. Introduction of technology to substitute manual labour is an example of this. Applying this lever involves having a good knowledge of current market offerings and industry best practices.
Tighter Process and Tracking
Policies and procedures such as cost allocation, budget approvals, sign-offs, a central point for ordering and tracking of inventory increases visibility and therefore accountability in demand generation. Unnecessary demand is reduced this way as personnel across the organisation are held accountable for the spend and have to think twice before requesting for the next good/service.
Increase Cost Awareness
The process of ensuring that demand ‘generators’ are aware of the cost impact of their decisions. Like ‘Tighter Process and Tracking’, this increases accountability of demand generation. A simple example of this is highlighting cancellation fees to travel bookers which can help reduce the frequency which these situations occur.
Strategic Sourcing is the process of better understanding the requirements of a business and aligning it with the suppliers in a market to achieve a lower cost through a more “strategic” approach. There are six (6) levers that are often used through the strategic sourcing process.
The process of providing more work to a supplier to take advantage of their economies of scale to deliver the service or product. Think “Volume Discounts”. Note that one must understand the suppliers’ business to truly understand if providing more work will, in fact, reduce costs.
Adjusting the specification of what the business requires to ensure that it is a fit for purpose. A simple example of a business requiring a pen: does it have to be metal, plastic, or a pencil?
Joint Process Improvement
The process of working together with the suppliers to reduce costs by adjusting both the suppliers process and the buyer’s process to eliminate waste. For example, the sharing of forecast and inventory information between buyer and supplier in the procurement of goods creates efficiencies for both buyer and supplier.
The process of adjusting the commercial relationship with suppliers such as the commercial model, payment terms, warranties, insurances required, and penalties for non-performance.
The process of expanding your search for suppliers from the local to the global market. In the last 10+ years, sourcing of products from Asia or other developing companies has provided many companies to reduce their costs.
Best Price Evaluation
The process of comparing prices of products or services. This can be done through tendering and also “should-be” cost models also known as “clean sheeting”
Category management involves the division of an organisation’s third party spend requirements into distinct groups of supplier relationships and supply markets to manage. Managing by supply categories enables and facilitates the value derived from the following levers which are applied when the supply relationship has already been established.
The process of ensuring the supplier is providing what the contract says. For example, ensuring that the agreed prices are being charged and that rebates (if applicable) are being collected. Considerations include having effective and efficient processes and mechanisms to track compliance.
Supplier Performance Management
The process of ensuring that the supplier is achieving the outcome agreed to. Commonly used tools to manage performance include measurement against Key Performance Indicators (KPI’s), supplier performance meetings and fostering a collaborative and effective relationship with the supplier to enable effective resolution of any performance problems.
Supply Chain Integration
The process of aligning supply chain activities of both the supplier and the customer to remove inefficiencies. Examples include the abolishment of administration tasks due to better alignment through to the sharing of equipment between supplier and customer to maximise utilisation such as idle trucks.
The process of working with suppliers to generate added value in the product or service offered. This may involve the sharing of resources between buyer and supplier for research and development purposes. A well-known example of this is Toyota’s approach to their first tier suppliers which involves collaborative working and sharing of knowledge. This has lead to productivity improvement in the supplier’s supply chain as well as enabling suppliers to propose better design ideas for products.
Leverage Market Change
The process of using changes in the market to adjust prices. This is sometimes captured by price-adjustment mechanisms. Here is an example when the market moves but the contract remains rigid.
The process of ensuring that company personnel are buying from the right supplier for the right products / services. This is especially important when preferential relationships with suppliers have been established and agreed supplier prices are based on forceasted volumes.