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How much should one buyer SAVE?

 

 

Last month, we addressed that long-standing question facing procurement managers – how much should one buyer spend? Or actually be responsible for? This month, the more important follow-up question – how much should one buyer save? Jonathan Dutton FCIPS scopes some suggestions for Supply Clusters members:

 

 

“What is the ideal spend amount that one professional buyer should personally manage?” This was the question addressed in last month’s column – and, we determined, there is no single correct answer – it depends.

 

Although research conducted by Grosvenor Management Group and cited by CEO, Peter McFarlane in the comments stream on LinkedIn under the last article highlighted two important growing patterns:

  1. Trends in a correlation between spend and headcount are emerging – perhaps inevitably – despite spend complexity being a key question.

  2. Public sector procurement teams tended towards as much as double the headcount to spend ratio as private sector procurement teams – perhaps justified by additional compliance and process requirements?

 

Savings ratios

So, given it is possible to justify differing amounts of spend management sums per head – just how much should one buyer be required to SAVE? Surely, that doesn’t depend on a myriad of factors? Perhaps it could just be straightforward?

 

Yet, if we are tending towards more standardised ratios of accepted spend per head, does this not mean that we are inevitably heading towards correlated savings per head target? What should the ratio of spend-to-savings then be?

 

The most obvious answer to this question of how much should a buyer save (which I often hear when asking this) is “as much as possible.” Or plenty. Naturally. But what level of saving is basically acceptable? What should the minimum be? Where do we set expectations? What should we target?

 

 

Savings targets

A good target might be derived from the question – what do we need to save? This hints that savings are more than just ‘good housekeeping’ but actually a strategy?

 

If an organisation has a budget gap, perhaps, or is straining to make ends meet, seeing their business model change perhaps, or looking to gain competitive advantage, targeting savings can be an entirely valid approach. Often, however, organisations facing such challenges first target faster measures such as naked headcount savings (staff redundancies & contractor dumps) or abstinence (recruitment bans, travel freezes, training halts) or draconian cuts (slashing 10% across all budgets).

 

Yet savings often have a role to play in any changing business. Sometimes they are even part of the starting business model to force margin where DIRECT expenditures are concerned, to build competitive advantage, or they can be just about margin improvement and profit-scraping using INDIRECT spend. But, ultimately, buyers must accept that if cost-saving is a strategy, targets have to be numeric and likely set as part of the business model at that time.

 

However, there are other routes to savings (neater specs, better process, stronger policy) beyond strategic sourcing activities – typically in categories like marketing services or travel. And, increasingly, in some categories, it is a category-specific strategy that makes a big difference in usage, on costs and on liabilities (waste management or energy) and not price reductions nor literal cost savings in themselves.

 

 

Other targets

Yet, as seasoned procurement professionals know, savings are not the only fruit. That is, increasingly stakeholders sponsor a far wider range of targets beyond the DIFOT (delivery in full on time) of the FIVE RIGHTS and haggling a few bucks off what we spend with suppliers.

 

On the two-day JDC Strategic Procurement workshop, we discuss the EIGHT benefits of a more strategic approach to procurement:

 

 

The EIGHT Primary Benefits of Strategic Procurement

  1. A certain cost base

  2. Secured supply lines & improved time to serve

  3. Responsible & sustainable supply solutions

  4. Goals aligned with policy

  5. Driving beyond compliance

  6. Brand reputation protected

  7. Innovation & added value commercially

  8. Competitive advantage

But all the strategy in the world isn’t yet going to alter the perception that savings are what procurement does. They are table stakes for a procurement department. Standard. It is what people think we do.

 

 

So, how much should we save?

At the risk of avoiding the question, there is one utterly compelling factor before agreeing on any saving target – the maturity of any addressed spend. A category that has been previously addressed many times will inevitably attract a lower savings yield (if any) compared to virgin spend, never previously addressed by professional procurement. This was covered in the last article.

 

A new category, especially an INDIRECT one, will often bring high savings when first market-tested competitively – normally well into double figures. In this case, always accept 10% as a wager. Traditionally, professional buyers have not been shy of the idea of a gamble on savings against virgin spend. In the conference bar, many refreshed buyers will offer to trade their salary for a percentage of annual savings. Their confidence becoming more likely to drop over time.

 

Because if you are following a long line of annual tenders (well-addressed spend in other words) don’t forecast more than very modest savings, under 3%, and sometimes get prepared to argue prices should not go up.

Spend management maturity can largely determine savings yield.

 

 

Savings tend to ZERO over time

This is because savings levels tend towards zero over time. Economists explain this truism with the theory of ‘diminishing returns.’ There are only so many times you can go to tender for the stationery supplies and expect savings. Or for anything really. Market testing has limits.

 

This means that savings targets early in a procurement team’s regime make sense. Strong savings targets downstream, less so. As the searchlight of procurement sweeps across categories, we reach a point where savings diminish. And, then what?

 

 

Delivering VALUE not savings

This is why procurement must do more than make savings.

 

It must align itself with the organisation’s goals and deliver VALUE. What makes this a difficult challenge is that we are rarely completely clear on what value is? Specific value to one organisation may be worthless to another.

 

Moreover, value changes over time. It matures too. Value today can become worth less tomorrow. Yet value created for tomorrow can become invaluable in future – strategic value. But that is a topic for another day or a random masterclass perhaps, or even the next article next month.

 

Savings per head

 

There is an inescapable truth in There is an inescapable truth in agreeing savings targets that an astute buyer should be wary of. You should, generally, save more than you cost.

 

If you cost a worthy $100,000 per annum salary, plus on-costs, overheads and the like; surely you should save more than that – regardless of expenditure levels? Yep. Pretty much. This is the starting point of any savings per head discussion for me – a saving to cost ratio of at least 1:1. Across the whole team.

 

A.T. Kearney define this essential ratio as ROSMA – return on supply management assets deployed. They calculate this ratio much as if it were any normal return on investment (RoI) calculation. ATK research ROSMA ratios by procurement team, by sector, by country, by anything really. They pin world-class savings levels at generally x8 costs and followers at x4 costs, with sector and maturity variances. But, measuring against cost-of-deployment of the procurement team, rather than against a percentage of spend. In fact, ROSMA ratios are little to do with spend levels. There is much on their website on this topic www.atkearney.com or via google.

 

Both CIPS and ISM received ROSMA warmly back in 2012. The arrival of the messiah? An industry-accepted way of measuring procurement worth? Well, only if you value savings & procurement resource efficiency as the principal procurement deliverables and nothing much else. The essential problem with ROSMA is it can be a very one-dimensional measure of procurement contribution. What about the EIGHT benefits of a more strategic approach to procurement (above) – how do we measure those contributions? Where do they fit in the model?

 

That said, ATK have broadened and developed the ROSMA benchmarking set and it has matured considerably since launch, now including links to their other work such as the ‘Chessboard’ methodology. They offer free self-evaluations through CIPS and ISM online via their website.

 

 

Setting savings targets

At the outset, savings targets should certainly be agreed not imposed. Ideally any management objectives should be agreed with the person to be responsible for achieving them – if you want them to buy-in and maximise effort that is.

 

Savings are no different. Nor cost-avoidance – you should count them and target them separately, by the way.

It is a good idea to work up a solid spend analysis before trying to set savings targets. An opportunity analysis even.

 

Maybe even evidenced with some analysis, some market research, some loose quotations from supplier perhaps, some competitor or peer benchmarking, even some mystery-shopping (aggregators like Supply Clusters are a great way to benchmark discount rates). Plucking attractive numbers from the big blue sky to build targets is hardly the best way to build credible savings forecasts that are likely to be factored into budgets and business plans. Or to achieve them.

 

There is no reason that savings cannot be targeted more roundly. That is from your Total Cost of Ownership (TCO) model or life-cycle costing model …. including maybe payment terms or discounted cash-flow improvements, working capital increases, even net present value (NPV) gains.

 

Even targeting non-numeric savings could work in some scenarios. Greater efficiency, productivity rates, better service levels, lower return rates, less rework, better DIFOT, lower MTBF, more STUFF, better JIT rates, no JTL (just-too-late) instances and the like.

 

Then, maybe, even risk reductions could count? Lower risk scores, liability reductions, broader insurances, longer warranties, better terms, some risk management planning.

In the end, plenty of things could count as savings really. And make plenty of ‘savings’ in effect

 

 

The bottom-line

Like last month’s question – how much should one buyer spend – an answer to the question of how much one buyer should SAVE also varies. You could debate it ad infinitum. There are many factors … And, ultimately, beauty is in the eye of the beholder. The stakeholder really.

 

But the question what should one buyer save can probably fit narrower parameters than how much they should spend per se:

 

Some simple parameters are a good place to start probably, simply that…

  • Any buyer should aim to save more than they cost in tangible cost savings – and ideally appreciably more than that; maybe even in line with lofty ROSMA benchmarks

  • Savings targets must bear some correlation to spend maturity – if not sheer dollar size in percentage terms.

  • Fake savings undermine procurement – as we have discussed previously

  • The definition of ‘savings’ targets can be widened…

  • And, ideally, steer towards a definition of what ‘VALUE’ looks like for your organisation and its stakeholders.

As we said last time, generating real business value from the supply side (better, faster, cheaper, safer, greener) can be very worthwhile. But, even though their expectations currently start there, the business will rate the effort far beyond just simple savings – so should we.

 

The conversation we need to have with our stakeholders is: What is value to you, and how should we aim to measure it? That is the real challenge we face in future. Savings should become an obsolete measure in time. Although we are not there yet. Savings are expected still.

 

So, right now then, how much should one buyer save? Well, as I said, plenty…

 

 

 

 

 

24th October 2019, Procurement / Supply Clusters 

 

 

Jonathan Dutton FCIPS is the former founding CEO of CIPSA - the procurement peak body in this region. He now works as an independent management consultant specialising in procurement and has a non-executive role at Supply Clusters www.jdconsultancy.com.au

 

 

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