Over the last couple weeks, I’ve explored ways that Procurement teams can more effectively help their organization’s weather the storm when it comes to catastrophic market conditions. This year’s challenges have certainly forced organizations to make tough choices – my hope is that managers can avoid having to lay off employees if Procurement can help cut costs to the greatest degree possible.
I’ve chosen to use the Kraljic Matrix as the map to this exploratory journey. In case you missed them earlier, we’ve already moved through the first two quadrants in the links below:
- Non-Critical Suppliers – Procurement can cut costs if we can avoid wasting time on high-volume, low-spend purchases. These purchases cost more in our time and energy than the price of the buys, themselves.
- Bottleneck Suppliers – Procurement can cut costs by taking back negotiating leverage held by these suppliers (but should more likely attempt to reinforce the supply chain here).
These two quadrants represent the bottom of our quadrant map, and are the tougher two to wade through in terms of cutting costs effectively:
Today, we head into Procurement’s bread-and-butter quadrant – the “Leverage” quadrant.
Leverage Supplier Relationships
Suppliers in this quadrant share a new key traits that make them stand out to Procurement teams:
- They tend to make up a larger portion of an organization’s product’s costs.
- They also tend to be in markets with an abundant supply. Organizations don’t face much supply chain risk.
- Typical supplier sales strategies point out and pick apart perceived competitive differentiation… this is often smoke and mirrors. Many purchases here are fairly commoditized.
When Procurement thinks of cost savings, this is the traditional “sweet spot” that is top of mind: Low risk with high reward. Going to market with an RFQ or RFP will likely yield results. But, in a space where we’ll always find some cost reduction, how do we know we’re maximizing our success?
Maximizing Leverage Supplier Relationships
I won’t delve into the tactical elements of going to market with an RFQ or RFP. You’re probably aware of them or, if not, there are plenty of resources to learn more. Instead, let’s focus on elevating Procurement’s role from the tactical to a more strategic level.
How can Procurement influence the nature of the purchase in order to maximize cost savings?
When Procurement functions tactically, the team is handed a scope of work or spec sheet by stakeholders and is expected to craft and execute an event using those parameters. However – are those the right parameters?
Viewed strategically, Procurement should be digging into these parameters and asking, “why?” In other words, are these real requirements, nice-to-haves, or irrelevant to the need entirely? Consider a request for printed materials – A stakeholder approaches Procurement with the following specifications:
- Full color cover/back, full color pages
- 100# stock paper
- Printed to bleeding edge
Are these specs valid? If the print job is for a small, prospect-facing brochure then potentially so. They’d make for effective marketing visuals. However, what if we’re talking about a hundred page instruction manual for a product? These specs would be overkill. We could take these specs to market and get some level of cost reduction… but any success would pale in comparison with rightsizing specs to better fit the need.
Considering Total Cost of Ownership
One mistake I’ve seen among Procurement teams time and again is hyper focusing on unit price and forgetting about total cost of ownership. Getting the lowest unit cost is meaningless if other associated costs aren’t taken into account:
- What if the cheaper unit price option requires more resources to operate?
- What if it is more prone to downtime, cutting operation time and output?
- What if replacement parts are more expensive, or wear out faster?
- What if average lifespan is half that of a more expensive unit price option?
Think through the use case with stakeholders and develop a complete understanding about the costs hidden below the surface. Stakeholders, themselves, may not be fully considering TCO.
Keep Control over the Event
One of the greatest benefits of a strong supplier relationship is the ability to leverage that supplier’s subject matter expertise above and beyond the purchase. There are plenty of ways Procurement should utilize this expertise. Market event development is not one of those ways. Focusing on refining requirements and placing the right emphasis on TCO only works when Procurement retains control of the sourcing process.
When organizations don’t have internal expertise, they lean on incumbent suppliers to help guide them along the process. The problem here is clear: allowing an incumbent to guide the RFQ or RFP process opens the door to a conflict of interest:
- Incumbents often propose shortened event timelines. Why? Because they already have a leg up on the competition – they understand an organization’s environment and may be working on a proposal before the event is released, giving them an advantage.
- Incumbents emphasize artificial differentiators. Is the incumbent proposing requirements because they are critical or simply to differentiate themselves? An example here is tech development or managed services – an aging incumbent may propose years in business as a key point (touting their 30 years). However, in the world of cutting edge tech development, how important is decades of experience when tech that old isn’t even industry standard anymore?
- Incumbents push their strengths (and hide weaknesses). Some KPIs will be more or less important to an organization. However, an incumbent may propose that KPIs they’re naturally good at tracking against are of higher importance than they should be. Likewise, they may put critical KPIs that they struggle with lower on the list.
So, how can Procurement move ahead if they don’t have SME and can’t rely on an incumbent? The best bet is kicking off the event with an informal RFI. An RFI signals to participants that an organization doesn’t know the best path forward to solve a problem and that they may have the chance to win business when the formal RFQ or RFP is released down the line.
Keep an Eye on “Why”
The concepts above may seem like common sense, so why do so many Procurement teams forget about them? When everyone on the team is focused on keeping the trains running, there’s a strong push to follow a simple path forward.
What we need to do instead is constantly question, “why?” Why are we making this purchase, why are these the specifications or scope that we’re using, why is this our go-to-market strategy? So on, so forth. By understanding the strategy behind these actions, Procurement is in a position to confirm that savings outcomes are the best they can be.
By this point, we’ve covered the vast majority of all suppliers we work with. While the last quadrant covers the fewest suppliers, they’re also the most important suppliers to our organization. In our upcoming final installment, we’ll cover how to manage Strategic suppliers.
Author: Brian Seipel
Job Title: Advisory Consultant