Heads of Procurement have told me that all the big procurement savings are now gone. But is this true? Do we just need to change the way we think?
Procurement departments are often challenged to squeeze every last drop out of their supply contracts. But in recent years, many Heads of Procurement have told me that all the big savings are now gone. All that is now left are small incremental savings.
However, I don’t believe this is true. I believe that procurement departments are just stuck in a rut, or what mathematicians call, a false minimum.
And here’s why.
Strategic sourcing has been the main tool used by procurement departments over the last 20 – 30 years to generate significant savings for their organisation. They started looking more strategically at how supplies are purchased by an organisation instead of just looking at them as a simple transaction.
The strategic sourcing process generally consists of taking part of an existing supply chain, the one that the supplier fulfils, and optimising it. The key word here is optimisation. Most of the time, the way the suppliers are engaged rarely changes significantly. It is just made them more efficient.
And for years, this was enough.
For years, the strategic sourcing process generated significant savings by ensuring:
– purchase price consistency across the organisation,
– volume discounts and competitive prices were negotiated,
– products and services were rationalised and also substituted to remove any gold plating,
– and cheaper offshore providers were considered
And this is just a few.
But these days, many businesses have optimised their supply contracts. They have reached a point where generating additional savings cost more in effort that what could be achieved. They have reached a minimum.
But I believe that there are still big savings out there. I believe that procurement departments are just at a local or “false” minimum and the true minimum has not yet been reached. But in order to reduce our costs further, we need to change our thinking.
I believe that we have spent so long optimising parts of the supply chain, that we have forgotten that there are other ways to achieve the same result if not better.
And this is why.
It is often easier to improve something by 10x than it is to improve it by 10%. The reason is that to improve something by 10% you have to be better than everyone else that has come before you. To improve something by 10x you just have to do it differently.
History is littered with examples. Just think of any invention like the invention of large flat screen tv’s from the older, smaller, and deeper cathode ray tube TV’s.
The problem, as I see it, is that the strategic sourcing process rarely radically changed the supply chain, it just optimised it. The reason is that Procurement departments are often reactive and take what the business thinks they need and starts the market engagement process from there. Rarely do they challenge the business to see if what they want is really the best and most efficient.
So when next reviewing a supply contract, don’t just renew what the business is currently doing, understand exactly what the business needs and challenge the constraints. It is through this process that you will generate the next big savings.