The larger your business, the more leverage you have with suppliers. Instead of suppliers manipulating their pricing for maximum profits, you’re able to use your spend knowledge to leverage buyer power, bringing cost savings to your business, while still making it a valuable proposition for suppliers to favour working with you.
It all starts with categorisation.
Using categorisation of sales to leverage bulk price discounts
1) Item categorisation
It’s one thing to list an item but it’s quite the other to tag it to the right category. One way to categorise items being purchased is to use a hierarchy.
1. Chief category
Take for example replacement keyboards for computers. You could categorise that as office supplies. Using the hierarchy above though, that could be computing as the chief category, the main category, electronics, and the subcategory, replacement parts.
Costs could be cheaper by buying in from an electronics supplier offering bulk price discounts that aren’t on offer from a general supplier of office equipment.
The choice of categories gives your business more choice over suppliers rather than sticking to one general area. The reason being, suppliers in a specialised category will have a higher price per unit and therefore charge more for their expertise. It’s not to say you couldn’t get a better deal elsewhere on the same equipment.
Categorise what you buy so that you can accumulate the most units per supplier based on your category hierarchy to take advantage of bulk unit pricing.
2) Supplier categorisation
As the first step is about maximising the units you buy in at one single time to take advantage of bulk pricing, this part strengthens that to ensure that whatever you are buying, you’re only dealing with the minimum number of suppliers. That’s advantageous in itself, however what it’s also doing is putting buyer power in your favour because the more you order with one supplier, the better leverage you have to negotiate better pricing per unit.
3) Maximise category budgets
Whatever category’s your business spends on; you need to know them in order to maximise them. Ideally, what you want to do is lower the number of suppliers which reduces your administration costs, but more importantly it increases your spend per supplier. That again, puts buying power in your favour. The best scenario would be to find one supplier who can deal with your chief category, main category and sub-categories.
4) Leverage your buying power
The categorisation of items you buy will let you narrow your choice of suppliers but that’s useless if you don’t play it up. When you request a proposal for anything, stress that you’ve categorised expenditure and let suppliers know your overall budget at an organisational level and that you expect favourable pricing based on the volumes of transactions. This will also help you take out any supplier that isn’t large enough to cater to your needs.
5) Review and negotiate if you need to
When you categorise your expenditure and assign budgets to categories and then further add to that multiple sites, there’s often times extremely large volume. Sufficient enough to leverage discounts provided you work with a supplier who can meet your demands.
Some will be too small to manage your demand. Larger suppliers are often more expensive until bulk price discounts are applied because that’s the business contracts they are focused on attracting. When you match your contract requirements to the specialities of suppliers who target your type of business with volume discounts, there’s huge cost savings to be had.
The fastest way to access the savings is by categorising what you buy, lowering the number of suppliers you have and increasing your spend budget per supplier in order to make it attractive for suppliers to propose discount pricing.
Businesses across England are set to benefit in reduced water savings, and enhanced services when the new retail water market emerges.
There’s no fixed date as of yet for when England introduces the retail sector for water. It’s expected to be sometime around April of 2017. When that happens, you could see your bill drop and quite possibly by a considerable amount.
There may be some business owners dreading the change though, thinking that it’s going to be just another utility, invoice and more suppliers, adding up to increased administration costs.
When there are admin costs, there’s savings to be had.
What’s more is that commercial water and sewerage can be combined into the one supplier. Given that business customers will be dealing with retailers, along with the new supplier comes customer service.
As things stand just now, you can’t exactly call up the water board and have an advisor come to your site to provide you with a water efficiency report. You need to bring aboard a consultant for that service. Given it’s a new market opening, new retail water suppliers will be competing for your custom so there’s no telling what’s going to be on offer.
In addition to the water services, it’s expected that other utilities such as telecoms, gas and electricity may be offered under the one contract. That will be of benefit to multi-site operations, as it will drastically reduce the administration involved. On that note, so too will be how you manage your utilities.
With other utilities, such as gas, electricity and telecoms, you can manage your bills online, including settling invoices. That doesn’t currently exist in the water market. The current water market has been described as an “analogue service in a digital age” something that will be changing when the retail water market emerges. The entire industry will change for the better, making it easier for commercial contracts to be managed, and savings made by choosing your supplier carefully and managing the contracts efficiently.
The most savings will be made (and fastest) by larger firms with multiple sites. The reason being, those are the companies water retailers will be targeting in early 2017 in a bid to win competitive contracts. Right at the time when the majority of business owners who haven’t researched prior to the water retail sector emerging won’t know much about the changes therefore, won’t know of the true potential savings.
For efficiency, it’d be wise to keep an eye on the Ofwat regulated companies so you know the companies that can supply you with the water services you need.
Companies will be required to obtain a licence from Ofwat. Those who do meet the licencing criteria will be listed on the website here.
There are two licences:
1. Water supply and/or sewerage licences (WSSL)
2. Water supply licences (WSL)
Some water retailers will only be licenced to sell you a water delivery service, with others being licenced for both service delivery and managing the sewerage.
What to expect when the water market opens
When the market opens (expected April 2017) retailers won’t only be providing water. There will be smart meters and advisors. Real people to help you with monitoring your water usage, increasing water efficiency, thus reducing your wastage and the subsequent charges wastewater incurs. In other words, they’ll be able to help your business become greener and operate smarter.
While it is a new market for England, it’s not unique to the UK.
Scotland opened the water market in 2008. One supplier in Scotland was able to assist a caravan park to reduce the water consumption by 20% by harvesting rainwater. With water retailers acting as advisory services, partnering with the right supplier could become a pivotal part of your environmental or sustainability policy.
Another example to come from Scotland is in the public sector where bundled deals were tailored to five schools, reducing the cost of wastewater by £56,000 per annum. That was done by increasing efficiency by 44%.
Of course, in order for suppliers to measure the results, smart meters will need used and the retailers providing the service will need to include benchmarking as part of their service provision to guarantee you that they are actually offering you a service and not just selling you water.
As with everything that involves commercial purchasing and contracting issues – research the market before committing.
For multiple sites, there will be cost-savings to be had, and those smaller sized firms who don’t expect to save much, it’s likely to be another service that will benefit from collective purchasing so every size of business throughout England will be able to benefit from the open water market when it emerges. In particular, those who bundle together water, energy and telecoms as part of an energy management strategy. With that in mind, if your energy contracts are due to renew, it may be worth holding out for a few months before committing to a long term fixed rate, which will affect the amount you can save.
Be ready to save.
The Pareto Principle applies to business expenditure as much as it does to many other aspects of a company. With a well-managed procurement process, strategic spending will account for 80% of a business’s total expenditure. The other 20% is where it becomes problematic because the purchases are:
· Of low value
· Bought by people outside the procurement area without buying knowledge
What we mean by buying knowledge is that not all members of a workforce know about service level agreements, are concerned with contractual obligations, or know the specifics of buying on a commercial capacity.
That last part of staff is a critical aspect to address when you’re looking for a tail-end spend solution to bring your complete procurement process up to 100% managed level, rather than 80% managed well and 20% running amok.
4 Steps to Retake control of your expenditure
1) Identify the low value purchases
This is one that’s pretty easy to do yet it remains undone in many a business. It can be done with just an Excel spreadsheet, but you’ll likely find whatever accounting solutions you have in place will also be capable of sorting your expenses by value.
Take a list of your expenses and arrange them from high to low. At the top will be your most used supplier. You’re likely to find that the Pareto Principle of 80/20 can be applied to your expenses. If you work with five suppliers, the bulk of your purchases will be with around four suppliers. Yet you’re likely to have many more suppliers invoicing – and often regular.
The reason being that at the bottom of your list will be numerous spontaneous purchases, occurring with multiple suppliers and be of such a low value amount that the accounts department has paid the invoices and never really investigated it.
When you delve into your smaller purchases, you can find that the total amount of them is substantial. Substantial enough for you to want to invest in making changes to minimise the leakage this problem’s causing.
Identify where the leak is by finding out the suppliers and categorising purchases.
2) Get staff buy-in
Whatever solution you implement, staff must be on-board. Give them the information they need to know about how buying will work. Whatever they need to buy-in, have procedures in place for them to follow.
Hint: A list of preferred suppliers or one preferred supplier per category will greatly increase the volume spend and minimise incoming invoices.
3) Implement categorical purchasing
With the buy-in of all your staff, it’s helpful to let them know about the buying process applied to procurement for strategic sourcing; the hierarchy of the chief category, main category, and the sub-category.
When staff can do this that have the authority to make buying decisions, they can then allocate a category to their purchase and divert more to the same supplier, reducing the amount of fragmented purchases. This happens much more than you think when you take into account the amount of people with buying power for low-value purchases across multiple departments requiring the same stock.
4) Have credit agreements with preferred suppliers
Instead of being invoiced per order, have your preferred suppliers invoice periodically, such as monthly or fortnightly for high value accounts.
The reason you want to have a credit account is because you’ll have less invoices and it’ll make it plain-to-see to suppliers how much your regular spend is. This is helpful when you go into negotiations as it gives you buyer power, helping your business case for a discounted transactional unit cost.
Strategic buying is difficult to roll out for every single purchase a business will make. There’s far too much involved. Things like stationery that doesn’t require office personnel to have to run through the accounts department for approval prior to purchase. There are a lot of those purchases adding up and approval isn’t the solution. That’d slow the process down, making it detrimental to operations.
A successful buying program will have staff on-board with a policy and procedures in place so that everyone knows your policy on what can be spent and how they should go about buying what they need and will be in the best interest of the business.
Strategic buying can account for 80% of your total expenditure but if you leave it at that, you’re leaving money on the table. Combine category purchases to increase your buyer power and minimise the administrative burden that out-of-control tail-end spend brings.
The increasing use of IT equipment, the employees to operate them and the office spaces to house them has led to a surge in demand for energy efficient air conditioning installations.
Office complexes and retail outlets account for the vast majority of installations and for good reason too. Businesses need their staff to be comfortable for maximum productivity. In retail stores and outlets, temperatures are controlled for staff and customers’ benefit. The cost of maintaining optimum temperatures… well, that can get out of control and fast.
Do you know much about your air conditioning units?
Not many do. The bill comes in and it’s accounted for as energy, alongside the heating, and other utility bills. Most go about their business completely oblivious to the amount of money being thrown at energy suppliers that could be kept in the business bank account, just by having an economical air conditioning system running.
Given the climate of the UK, there’s really no need for all that much of a sophisticated system. We have cool temperatures most of the year, which allows for HVAC systems to make use of “free cooling coils”. With these, the air is drawn from outside, and then circulated to cool the indoors. The systems that waste energy don’t pull air from outdoors, but instead draw the heated air from indoors, only to cool it with a “fan” coil unit, thus wasting electricity.
There’s no point having your heating running to heat the air up, only to have your air conditioning system kick in to cool it back down again. That’s what causes energy bills to double. Yes, operating an air conditioning system can see your energy bill rise by 100%. Often is the case, it’s because of heating and air con competing to maintain temperatures.
It’s not always the system that’s at fault as it can be the installation. Energy efficiency with heating, ventilation, and air conditioning (HVAC) systems is best done with a dead band. That means that the heating and the air conditioning co-operate on the same network with a temperature differential between them for when they’re programmed to start and stop. They’re programmed to operate automatically to maintain a consistent temperature. They do need to work together, on the same network to prevent two systems competing, one heating, and the other cooling at the same time.
As a rule, air conditioning systems should not be operating in temperatures under 24o C. Where the dead band comes in is when the heating is set to maintain that same temperature or very close to it. The Energy Saving Trust recommends a temperature gap (dead band) of 4 OC. This will prevent the two systems operating simultaneously.
For that reason, every air conditioning system must have variable operating temperature controls, otherwise, it would need manual oversight to operate, which would never be efficient for any business.
The Importance of System Zoning
Premises operating super old air conditioning systems are likely to lack this feature. System zoning is the most precise way to control temperatures indoors. And it’s pretty simple too.
The construction of air conditioning systems uses dampers. They open to allow air in to circulate it, and close when the room is warm enough. It doesn’t matter whether it’s using free coil or fan coils to cool the air, when the temperature heats above the pre-set level, the dampers open and the system kicks in to reduce the temperature.
With zone controls, there’s multiple thermostats installed throughout the building, which are all connected to the systems control panel, operating the dampers. The thermostats monitor the temperature of different zones, allowing one area that’s heated to be cooled down, but not in other areas of the building where it’s not needed. For example, in the canteen, where everyone is congregating for lunch, hot cuppas, microwave dinners etc.
For that reason, cost-efficient air conditioning systems will have system zoning unless you’re installing it in a factory or warehouse where zoning is going to make little difference.
That said though…
The Added Incentive
The government is adding incentive’s to businesses to have co-efficient air conditioning units installed through the use of your “Enhanced Capital Allowance”.
Here’s the thing though…
You can’t just take the word of any supplier, or independent contractor who comes along to offer you a system with claims of 20% reduced energy consumption. There are fraudulent claims being made on some systems, and the simplest way to avoid them is to check the official “Energy Technology List” (ETL) which lists all the tested and proven energy efficient systems. You can even search on there to find systems, manufacturers, and if you get a quote on a system you’re interested in having installed, you can verify the model number is listed to back up the claims being made.
If a product isn’t on that list, the ECA claim is void. Air conditioning systems that are proven to reduce your energy costs will be listed. If it’s not listed, it’s likely it’s not as efficient as the manufacturers marketing materials are claiming.
Now, discussions for these purchases can be long, so before ordering any, be sure to re-check the Energy Technology List to ensure it is still listed as it does get updated periodically.
For those looking for a cost-efficient air conditioning system, by using the ECA, the entire cost of the installation can be written off through the allowance in the year of purchase. That can provide a positive boost to cash flow right away, and then cost savings throughout the life of the system.
The outsourcing of procurement can be viewed by some in finance as handing over some or all of the control over the buying processes. The opposite couldn’t be further from the truth.
The truth is that outsourcing any of your procurement functions isn’t about passing over control. It’s about bringing aboard advisors, sometimes specialist advisors whose aim is to save in the short term and the long term simultaneously.
There’s many a way a procurement specialist could advise and bring expenditure down to increase net profits, but there’s also more benefits to be realised than the initial cost savings.
5 Ways Procurement Expertise Enhance Business Functions
1) It adds a broader skill set to your organisation
When you outsource any or all of your procurement, you aren’t necessarily outsourcing every aspect of your procurement. If you have the resources internally, outsourcing adds more expertise to your existing department and also gives your staff access to other in-field experts. That can also lead to business efficiencies being enhanced, which is the sole purpose of procurement. Outsourcing can add to that, rather than replace it.
2) Bottom-Line is Improved
All your expenditure throughout your organisation is net profit. If left unmanaged or even poorly managed, stakeholders will suffer. The objective of smarter procurement exercises is to reduce the overall cost of purchasing.
3) Improved Risk Management
When done properly, after thoroughly investigating your options, you should be partnered with a professional organisation with a thorough understanding of commercial trading agreements, litigation matters and contractual expertise. They aren’t lawyers by right but they should possess a great deal of knowledge surrounding commercial contract laws, which will be able to serve you well on a professional services advisory capacity, which you may already be outsourcing anyway.
4) Add appeal to your business
Clients are known to take businesses more seriously when they have a Corporate Responsibility Policy. They make it known that they are careful where they spend, making their businesses attractive to clients and investors alike. There’s a lot to be said for how you operate your business, and structure your processes to show you are operating ethically across your supply chain. That’s difficult to do without procurement expertise to assist.
5) Frameworks can lay the foundations to your policies
Operating without a procurement framework isn’t a good idea. With one, everyone knows your policies, where they stand and the processes/channels to go through when buying anything of substance.
You don’t have to specifically bring aboard a procurement officer to implement a procurement framework, as you could approach it through outsourcing to harness the existing frameworks already used by established firms specialising in procurement.
Outsourcing some or all of your procurement functions isn’t just about realising cost reductions. That it will do, but it also brings about some expertise that many businesses don’t have access to and the ones that do, the additional expertise adds to it.
All of the processes work to enhance your businesses reputation, while minimising risk to your business through effective contract management and where possible, change management too, but at the heart of the process is always cost reductions. Sometimes that’s in the short-term, other times it’s the long game that’s played with a lot of strategy for huge savings across the board.
In some cases, when businesses are struggling financially, it’s a revision of the procurement functions that could essentially turn the entire businesses finances around by realising savings already missed through poor contract management or even a lack of market knowledge.
It pays to collaborate.