Finding Hidden Money in your Procurement Process

"I love finding money in my Clothes while putting them for Laundry. It’s like a Gift for me….from me."

You know that feeling, right? Wouldn’t it be great if Procurement could show some additional money to the organization over and above their routine savings?

Wouldn’t the confidence of CFOs increase, when Procurement comes up with such benefits? How motivating would it be for the Procurement person in the Operations team, who is always proving Quality and Accuracy metrics to Category & Strategic Sourcing, to be able to show some real money?

Here are a few clues as to how Procurement can unearth that hidden Treasure:

Clue 1: Contracted Supplier but No Rate Cards Strange, but True, it's not always the Procurement professional who ends up negotiating everything in the Contracting phase with suppliers.

Both parties (Buyer & Supplier) will end up discussing and agreeing everything except the actual Pricing at SKU level and leave that to the actual time of Purchase. So, when the situation arises, Procurementbelieves that the Supplier must be providing the Goods & Services at the Right Price, because he/she is contractually bound.

Remediation! Procurement Leadership needs to ensure that an effective Contract Administration process is put in place, where a Contract should not be treated as a 100% pass on Quality, unless it has the Pricing agreed at SKU level with future provisions on price revision agreed. All Purchase Requisitions above a certain threshold value need to be stopped by Procurement to validate the correctness and competitiveness of the pricing quoted by the supplier. As and when, during the Purchase Requisition approval time, it is identified that Pricing is missing, the same should be agreed with supplier and a Contract amendment be put in place.

Clue 2: Contracted Supplier but Off Contract Purchase This is quite common. When detailed Spend analysis is being done for past Purchases, the analyst will observe that certain portions of Spend are going to Contracted Vendors but the same is not reflected under Contracted spend.

Why does this happen? There are couple of reasons here. First, the Procurement department has not put enough control in the Procurement process; and second, the end user (Requisitioner) lacks awareness of the Contract in place and its implications.

Remediation! The easiest fix is to have a robust Procurement governance process in place, wherein every single Purchase Request should come to Procurement for approval and an optimum time should be allowed for procurement to review the request. While the high value transactions should go via the Category owner or Procurement Manager, the low value transactions can always be managed by the operational team, which could be in third party outsourced premises or a shared services centre. It is very important to establish governance in the Supplier set up process, too, where nothing should be approved or set up off contract, if the supplier is already set up as a Contracted supplier. This may sound a bit transactional, however many companies end up doing this as a cure rather than preventing it. For goods and services that do not exist in the contract , it is recommended that a Contract amendment is initiated immediately after negotiating with the supplier and that those goods and services are added.

Clue 3: Differential Pay Terms How many times have you, as an end user, seen an existing supplier submit a Quotation with pay terms as 30 days, while you know the standard pay terms are 60 days? Do you do anything after this observation? The fact is that most quotations are accepted like this, and only later, when the Invoice arrives, will the reduced (30 days) pay terms be noticed. In the urgency of making payment, changes to the vendor master are generally requested and also approved.

So, despite the effort put in by Procurement, the Supplier is paid early and the company will lose its liquidity benefit.

Remediation! As a one time fix, the Procurement department along with the Finance department needs to clean up the Supplier Master and have the payments standardized in the system as agreed with the suppliers in the contract. Establishing governance over the process of Supplier master additions and changes drives control for all current and future transactions. Any addition or change in the supplier master that impacts the financial aspect of Procurement should come for approval through a governance process.

On the basis of these tips, it is entirely possible for a Procurement organization to find at least 1 to 2% additional savings within their department.