Procurement spend is one half of the equation to bolster the bottom line, productivity is the other.
Procurement teams can only do so much to minimize procurement spend. For more cost-savings CEOs need to invest in increasing procurement team productivity and controlling those costs.
The procurement team responsible for local, non-strategic sourcing at one of our clients, a large manufacturer of electrical components, comprised of 8 individuals, including a procurement manager, an administrative assistant, and 6 procurement officers. The procurement officers specialized by product category and doubled as procurement runners, dividing their time roughly equally between physical market visits and office work. Time in the office was spent coordinating with the technical and production teams to determine procurement needs, preparing requests for quotations, and issuing buying orders. Procurement officers were assisted in document filing and follow up calls by the administrative assistant.
Compensation of the procurement officers varied based on their experience, but averaged to a basic salary of Rs. 40k per month plus another 10k in allowances for transportation and communication. Factoring in the management and administrative costs and the infrastructural overhead required to support and run the team, the fully loaded cost of an agent came to approximately Rs. 120K a month. The total cost of running this procurement department was therefore in the vicinity of Rs. 10 million a year, translating into 2% of the Rs. 500 million in total indirect spend under the team’s management. While this figure did not exactly break the bank, it was, nevertheless, more than double the global best-in-class average of 0.8%.
On its own, this was a point of concern for the top management, and became even more pressing when we accounted for the slew of additional costs the company incurred, which, while not explicitly counted as procurement opex, nevertheless were part of it. These included the cost of auditing the procurement team, which clocked in at a prorated Rs. 2.5 million for non-strategic procurement, and approximately another Rs. 2.5 million in running spend analytics for the CFO and CEO. There were further hidden costs pertaining to the time of the technical and production teams which would get consumed in facilitating the purchase officers and helping ensure the right parts and supplies were sourced.
While evaluating the cost savings generated by this procurement team was outside the scope of our diagnostic, we know that a best in class team—equipped with the right resources and focusing on value added tasks—is able to generate savings of up to 10% of indirect spend. Given the activities of our client’s team and their time allocation, we suspected the savings being achieved were likely well below potential.
The core issue facing the client was one of procurement team productivity. Specifically, the bulk of the team members’ time and efforts was being spent on relatively low skill tasks such as generating RFQs and purchase orders, spot buying, and document filing, rather than value added tasks.
The market visits conducted by the team were primarily for purposes of making purchases as opposed to utilizing time for vendor relationship management, vendor development, and price research. The office activities were administrative in nature, with negligible time spent in proactive planning, demand management, order consolidation.
Furthermore, the entire procurement process chain was distributed across several departments, including the technical team, the finance team, and the audit team.
The end users in the technical teams remained a step removed from the procurement process, when they should actually have been originating the requisitions and closely engaging in the selection process. The analytical work on spend data was being outsourced to the finance team, who self-professedly lacked the product specific technical knowhow to draw material insights. And transparency on procurement was being delivered through spot checks by the audit team, an effective duplication of the entire procurement tendering process.
Based on our diagnostic findings, the client signed up for the Prism Enterprise Package in an effort to reduce costs and streamline their procurement processes. The use of Prism minimized their need to audit purchases as all quotations sourced through the platform get benchmarked against other market transactions for the same product. Our sourcing support function provides an added third party check. The built in dashboard and reporting features helped reduce nearly 80% of the finance team’s time spent on preparing procurement spend analytics reports. These savings alone immediately paid off the cost of the Prism platform more than 3 times over.
To further improve efficiency and increase collaboration, we provided the technical and production team members with user credentials, to enable them to originate product requisitions and directly interface with vendors, ask questions and clarifications, view available products, and contribute to the selection process. All requisitions continued to follow the defined approval workflow, providing full visibility and operational control to the procurement team while reducing the need for them to serve as an intermediary between the end user and the vendor.
The true value of the Prism platform comes in the time it frees up for the procurement team to engage in higher value tasks. Within two months of full usage of the platform, market visits required by the team had declined by just under 50%, increasingly being limited to visits for payment and collection of goods. Office time spent on creating RFQs, generating comparative statements, and documentation and filing declined by about 30%. This freed up the procurement agents time to begin focusing on consolidating purchases to get better terms, reducing emergency purchases, and improving purchase price negotiations. At our client’s scale, for every 1% reduction in their indirect procurement costs, bottom line profitability increases by Rs. 5m.
Cost control is about utilizing resources effectively; at Khareed we try to enable that culture of best practices in procurement through reducing time on administrative work and increasing visibility on value-added opportunities.