Over lunch, the CEO, CFO and CPO of a large corporation were chewing the fat. Topic: Cost Reduction
CEO: “We spend $100m a year – how can we get better prices on more of what we buy without lowering quality or increasing risk?”
CPO: “At one level, it’s pretty simple… Right now, about 25% of our total $100M spend is against formal contracts and we save an average of 17% across those contracts. That’s a savings we’re already getting of $4.25m. If we could increase that percentage to 60% – which is entirely possible – we could save another $5.95m (+$35m x 17%).”
CEO: “That’s a big number – I’m not sure I can believe that’s possible. How would we do that?”
CPO: “We would attack the problem in a couple of coordinated ways:
- More strategic sourcing events each year for high value, critical items – we can only do so many today with the tools and resources we have.
- More procurement-assisted competitive bid processes for spot buys of high ticket items and significant outside services – right now the departments often do that themselves because they feel we’ll just drag out the process.
- Consolidate our purchases of certain categories into fewer suppliers to gain larger volume discounts – we’ve got many different suppliers for the same basic things across our different business units today”.
CFO: “I’d like to add… I know our people don’t always use the contracts we already have. In order to actually realise that savings, we would also need to:
- Establish better ways to ensure people actually use the contracts Bob’s people negotiate – that certainly is not always the case today.
In addition, we should:
- Somehow let people know when we already have what they need in inventory before they buy it again.
- For certain things like IT equipment, steer people to the right “expert” who can correctly evaluate what they really need so they don’t over-buy or buy something that doesn’t end up doing the job.”
