Best Practices for Procurement Savings

Explore Best Practices for Procurement Savings

PurchTips Edition #446

The Modern Procurement Department is required to realize procurement savings objectives by utilizing various means. Traditional methods focused on quality, delivery, terms, warranty, negotiations, contracts with a hyper-focus on price. Price has traditionally been the most critical Key Performance Indicator, not the Total Cost of Ownership (TCO). Indeed, TCO has been seen as “theory”, and not to be examined in a practical sense. Today’s Procurement Leaders are required to leverage their departments and supply chains to Gain Competitive Advantage.

The Mission of Modern Procurement is best realized by looking beyond price for Cost Reduction.

The following are Best Practices for realizing Procurement Savings:

  1. Leveraging Design for Strategic ProcurementThis is realized by designing your Procurement Function in such a way that it is underpinned by two axes:
    • Enabling Value CreationValue is assessed primarily from the perspective of customers, then by stakeholders. The understanding that organizations exist to create value for its customers is paramount. Value in itself has three components,
      • A transformation from one stage to the next exist
      • All activities involved in the transformation processes are done right the first time
      • Your customers are willing to pay for the resulting products and services.
    • Enabling Corporate Strategies – Your Procurement Savings Department Processes should be designed in a manner in which they are fully integrated into and support he realization of your Corporate Strategies and Objectives. Therefore, all the activities in your Procurement Function create cause and effect relationships with Corporate Strategies.
  1. Leveraging an Annual Buying Plan: An Annual Buying Plan leverages several critical components to assist in cost reduction initiatives:
    • Categories to be Procured
    • Forecast of quantities to be procured
    • Savings and Operational Targets
    • Methods to be leveraged to execute the dimensions of the Annual Buying Plan
  1. Unlocking savings by exposing and eliminating the 7 Wastes: The 7 Deadly Organizational Wastes are an ocean for Cost Reduction and Savings Opportunities.
    These 7 Wastes are:

    • Excess Inventories
    • Excess Motion
    • Excess Transportation
    • Excess Waiting
    • Over-Production
    • Over-Processing
    • Defects
  1. Unlocking savings by reducing the 6 big losses: There are 6 major losses in business, and the cost to organizations can be staggering.
    The 6 Big Losses are:

    • Unplanned Stops
    • Planned Stops
    • Small Stops
    • Slow Cycles
    • Production Rejects
    • Startup Rejects
  1. Continuous Collaboration with Upstream and Downstream Processes: This involves collaboration with suppliers, strategic partners, internal departments, and customers. The key is to understand their interest, have them understand yours, and negotiate methods on the deployment of innovation, technology and knowledge transfer, and cost reduction opportunities
  1. Continuous Source to Pay Process Improvement: This involves the deployment of Process Improvement Methodologies such as LEAN, Lean Six Sigma, and Kaizen. These methods focus on problem definition, impact assessment, root cause analysis, solution selection and control processes. These initiatives have saved billions of dollars around the globe

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Are you a procurement leader whose team isn’t achieving the results you know are possible?
Maybe it’s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.

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Copyright 2019. This article is the property of the Next Level Purchasing Association and may not be copied or republished in any form without the express written consent of the Next Level Purchasing Association. Click here to request republishing permission.

By David Millington, SPSM, SPSM2, SPSM3 - Director of Education (Next Level Purchasing Association)

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