Lower Procurement Costs by Using Strategic Sourcing
Despite the recent stock market slump, the broader economic picture for the country remains strong. Revenue growth has been an especially welcome sign of the times. But revenue, of course, is just one side of the financial equation. Costs are the other side and controlling the costs that support revenue growth is critical to maintaining margins and improving profitability.
CFOs are continuously looking for ways to control costs while also driving process improvements that will meet compliance requirements and mitigate risks — especially when dealing with their supply base. Large organizations can utilize technologies that use software solutions referred to as strategic supply chain platforms. However, these can be costly and time consuming, though ultimately beneficial when integrated with ERP systems.
Cut Costs, Minimize Disruptions
An alternative solution for small and mid-sized companies is to implement strategic sourcing to lower procurement costs. This can help improve your financial and operational results by cutting costs while resulting in the least disruption to your business and your corporate culture.
In a CFO.com article1, the authors discuss several different components to a strategic sourcing initiative, including the following:
Contract review & management
Any decent-sized company likely has many different contracts with vendors, some of which are renewed automatically each year. If someone isn’t responsible for reviewing these contracts regularly, you could end up paying for services or technology that you no longer need.
Your strategic sourcing initiative should establish a process for organizing and reviewing all contracts several months before they are scheduled to renew. During this review, you should discuss whether you are still using the services or technology provided by the supplier and/or they should be replaced. If you aren’t using this supplier’s services or technology, be sure to cancel the contract before the auto-renewal date.
Strategic vendor development
Sometimes companies can end up using several different vendors for similar purposes, such as hiring temporary labor. A strategic sourcing initiative will establish a list of preferred vendors who will be responsible for supplying services or technology. These preferred vendors will usually offer lower pricing while enabling you to streamline your purchasing processes.
Aggregation of spending
Similarly, companies sometimes purchase items in silos. For example, two different departments might place separate orders for office supplies from two different suppliers. A strategic sourcing initiative will aggregate and concentrate such spending with just one vendor — or a handful of vendors at the most. This will lead to better pricing and more efficient procurement.
This goes back to figuring out which services and technology you’re still using and paying for and which ones you aren’t. If your business is growing, things may change quickly — especially as related to technology. A good example is data center space and old technology platforms that are no longer in use. A strategic sourcing initiative will begin a due diligence process for determining which services and technology you still need and don’t need well before utilization management contracts expire.
Many suppliers know that a certain percentage of their customers will not take the time to carefully research the marketplace to find out if their prices and service levels are competitive given current market realities. A strategic sourcing initiative will gather sufficient market data and insight so you can determine if you are receiving fair and equitable pricing and service.
Your company could realize multiple benefits by implementing a strategic sourcing initiative, including the following:
1. Lower costs
2. Greater compliance
3. Improved vendor relationships
4. Lower risk
5. Process and performance improvement
The economic picture for the country remains strong, with revenue growth an especially welcome sign of the times. But revenue is just one side of the financial equation — costs are the other side, and controlling costs is critical to maintaining margins and improving profitability. Strategic sourcing is one way to lower procurement costs and thus improve your financial and operational results. An outsourced CFO services provider can help you implement a strategic sourcing initiative.
1 Five Key Components of Strategic Sourcing; John Marchisin & Mark O’Hara; CFO.com; November 29, 2018
John W. Braine, Partner, CFO Edge, LLC