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.