How CFOs can better understand and leverage Procurement’s role in Spend Control
As a CFO, you’re undoubtedly spending much of your time working to reduce costs wherever you possibly can; and trying to do so in ways that strengthen rather than weaken your organization. You may be working to reduce costs within the Finance function with initiatives like Accounts Payable (AP) automation. And like many CFOs today, you may be focused on the subject of Spend Control, possibly using tools such as eProcurement.
Gaining control and visibility of your Purchase-to-Pay (P2P) process is a big step towards realizing the benefits of Spend Control, including better management of budgets and consistent compliance with purchase authorization policies.
But the biggest benefit comes when you are able to actually reduce the cost of the goods and services your organization buys by channeling a higher percentage of purchases to preferred suppliers and contracts – i.e. to sources with the lowest prices and best overall value.
The four steps outlined below, all of which can be done within a few months with proper commitment, will provide important and valuable “quick wins” in many organizations:
1. Implement a central supplier directory:
Utilizing a procurement system to establish a central supplier directory – and the processes to keep it complete and up to date – provides an informational foundation to improve just about every procurement activity. Besides providing a single view of your suppliers (much like you have probably done for customers), a central electronic directory enables you to quickly:
- Eliminate redundant and excessive maintenance effort
- Improve Procurement team and Accounts Payable department productivity
- Enable supplier base categorization to support better spend analysis
- Improve the effectiveness of existing financial systems from improved supplier data
- Set the stage for supplier self-service data management
2. Strengthen supplier qualification and contract review processes:
Supplier qualification and contract review processes are critical to maintaining a solid supplier base and avoiding undo risk. But they can take a lot of time and effort. A good procurement system will support streamlined processes that can quickly do several important things:
- Identify existing supplier risk so steps can be taken to mitigate it
- Reduce risk, and the associated cost, going forward
- Improve Procurement team productivity by automating supplier reviews and performance assessments, as well as the contract review process
3. Perform a supplier rationalization process and establish corporate contracts:
Once a central supplier directory is in place, suppliers are categorized for effective spend and risk analysis, and a solid qualification and review process is implemented, you will be in a position to address what is likely to be your biggest “quick win” opportunity: supplier rationalization.
If your organization is like most, you have accumulated far more suppliers in many categories than you really need, while possibly having too few in others. Spreading your spend across more suppliers than necessary dilutes your buying power, while maintaining only one source of supply in key areas may represent too much risk if that supplier should fail to perform.
Using information from your supplier directory along with spend history and other information from your financial systems, a supplier base rationalization initiative will enable you to:
- Reduce the overall cost of purchased goods and services by negotiating lower prices and better overall value when you consolidate your spend to just one or a few good suppliers per category
- Lock in savings through corporate contracts with preferred suppliers
- Where appropriate, reduce the risk of reliance on just one supplier in certain categories by establishing relationships with one or more additional suppliers
4. Deploy a supplier network
One of the best tools for reducing administrative expense in both the short term and long term is deployment of a supplier network which can dramatically streamline two-way communication with suppliers. You can use such a network to:
- Reduce initial supplier engagement effort by enabling potential suppliers to apply for approved status and answer questionnaire online themselves
- Reduce supplier on-boarding effort by enabling suppliers to enter or upload profile and catalog information themselves
- Reduce sourcing event effort by enabling appropriate suppliers to browse open invitations to tender, download RFx documents, upload responses, and view award status
- Reduce the workload in Accounts Payable by enabling suppliers to access account information themselves
- Reduce supplier information management effort by enabling suppliers to maintain changes to their profile and catalog information themselves
If you already have these capabilities in hand, your best opportunities for quick savings may be in better contract management or streamlined sourcing processes. A good procurement system will allow you to start wherever your best opportunities lie, and move towards the ultimate benefits of an integrated approach in the phases that work best for your organization.