Hello, Good Buys: Finance Departments Tend Not to Give the Purchasing Function the Attention It Deserves, since the Potential for Cutting Costs in This Area Is Substantial. Jeff Gargan Offers His Guide to Sharpening Your Organisation's Procurement through Spend Category Cost Management

By Gargan, Jeff | Financial Management (UK), November 2004 | Go to article overview

Hello, Good Buys: Finance Departments Tend Not to Give the Purchasing Function the Attention It Deserves, since the Potential for Cutting Costs in This Area Is Substantial. Jeff Gargan Offers His Guide to Sharpening Your Organisation's Procurement through Spend Category Cost Management


Gargan, Jeff, Financial Management (UK)


All financial managers would accept the idea that their department should play a leading role in reducing costs, yet how many have a strategy in place to measure the effectiveness of their organisation's purchasing activities? How many know what sums could be saved? How many simply leave it to the purchasing department? And how many report on savings targets as part of a broader performance measurement system?

The potential opportunities for savings in purchasing are enormous. According to a National Audit Office report in March, for instance, improved purchasing has saved the government more than 1.6 billion [pounds sterling] on an annual spend of 15 billion [pounds sterling]. It's aiming to save a further 3 billion [pounds sterling] over three years.

In local government, the Office of the Deputy Prime Minister is funding a series of centres for purchasing excellence as part of a new national procurement strategy for councils. In the health service, confederations are being created to establish collaborative purchasing as part of an NHS supply chain excellence programme. Of the total initial forecast savings of 500 million [pounds sterling] a year, about 55 per cent is expected to come from collaborative procurement. And, in the manufacturing industry, each 5 per cent reduction in purchasing costs increases profitability by an average of 35 per cent, according to the Society of Motor Manufacturers and Traders.

It's clear that savings are there to be made, but how can you assess your organisation's potential to achieve them and what should the financial manager's role be? The starting point should be to analyse the current expenditure using an opportunity assessment. At its simplest level, this is a breakdown of what is spent and with whom. Finance should be well equipped to lead on this task, because the data required will be held in the purchasing and financial systems. The panel below shows some of the key problem areas to consider.

There are a number of "early warning" key performance indicators that offer a guide to areas where savings could be made. Some of the typical measures might include:

* number of suppliers per spend category;

* average spend per supplier;

* value of spend by spend category with approved suppliers;

* value of spend by category not controlled through purchasing;

* number of invoices per supplier;

* average invoice value.

A checklist including these types of measures can be used to benchmark performance and work out a cost reduction plan.

Once the initial opportunity assessment has been conducted, a plan needs to be developed with the purchasing department to form a strategy for each category of spending. This should gauge the importance of each category, thereby creating a prioritised cost reduction plan. Some categories might include:

* Strategic items--major spend items of high strategic value to the business. Examples might be the implementation of major IT projects or the supply of vital raw materials. Typically, the strategy might include reducing the number of suppliers and managing them through close alliance partnerships.

* Leverage items--high-spend items of less critical importance. Examples might include utilities and telecoms. Typical strategic objectives might include maximising lever age over suppliers by aggregating spend, optimising asset utilisation and ensuring contract compliance.

* Routine items--high-volume, low-value items such as stationery. Typical strategic objectives might include reducing the supplier base and automating the purchasing process through e-procurement.

* Bottleneck items--low-value items where poor quality or limited availability can potentially disrupt the supply chain. …

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Hello, Good Buys: Finance Departments Tend Not to Give the Purchasing Function the Attention It Deserves, since the Potential for Cutting Costs in This Area Is Substantial. Jeff Gargan Offers His Guide to Sharpening Your Organisation's Procurement through Spend Category Cost Management
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