why you pay too much
DESCRIPTION
Find out why your business may be spending too much, and where to look for savings.TRANSCRIPT
Why are you paying too much for overhead expenses?
Active Cost Management 2009
TIMES ARE GETTING A LOT TOUGHER
Businesses need to find every penny of savings to survive
No management can ignore the importance of cost management.
In fact, management is an important part of the answer.
Overhead expenses have often been overlooked, because they were considered too small to be important
But now every drop counts
Examples of Overheads(Only external purchases)
Freight & Couriers Advertising
Office Supplies Packaging
Telecommunications Labour Hire
Safety Gear Media Buying
Travel Cleaning
Print IT Equipment
Electricity Professional Services
1. Policy
2. Contracts
3. Reviews
4. Specifications
5. Procurement Standards
6. Procurement Processes
7. Supplier Push-Back
8. Supplier Management
9. Staff Behavior
10.Management Behavior
Ten Reasons You Pay Too Much
1.Policy - Common
Failings
No policy developed for procurement overall
Travel policy?
Couriers
?
Electricity Supply?
Freight Deliveries – Outward?
Mobile Usage?
Office Supplies?
No policies developed for individual expense categories
See our website for more information on ‘What You Need in an effective Cost Management Policy’www.activecost.com.au
2.Contracts - Common Failings
No contract in place
Inadequate contract
Contract lost
Contract in place, but terms are unclear to stakeholders
Contract not enforced
Expired contract
3. Why No Review?
No strategic direction
No benchmarks
No Service Level Agreement
No Key Performance Indicators
No Supplier MeetingsTo Discuss Service Level Agreement
No Reporting
3. Specification
No effective communication between procurement and R & D in design phase
Wrong technology chosen - not aware of changes
Oversize orders
Product requires greater inventory control
Unrealistic delivery times
Unrealistic delivery requirements
Over or underestimating demand
Poor understanding of intended final use of product/ service
Lack of knowledge of expense category and current trends.
Wrong choice of ordering channels
Wrong choice of delivery options
Inappropriate risk aversion
Lack of knowledge of supplier’s industry
Poor procurement standards
Lack of policies
Lack of management interest
Low level of procurement skills or experience
Lack of industry contacts
Poor or ad-hoc reporting
Under resourcing
Lack of KPI’s
Lack of benchmarks
Poor accountability to stakeholders and internal customers
(Duck for cover)
Lack of the required detailed knowledge of each overhead cost category
6. Procurement processes
Needs analysis
Market analysis
Rfx documentation
Evaluation of prospective suppliers
Bias in supplier relationships may occur because staff want to
favour family members
or friends
or in a few cases, they may even be on the fiddle
or frustrated in their work by internal politics
Inconsistencies in procurement can arise due to decentralised procurement centres, and duplication of activity
Evaluation problems
Implementation problems
7. Supplier push-back
Naturally, suppliers will try to change the rules
They may change the product or service
Change the backup or service level
Change the data
Or change their costs by redefining the product from this … to this
They may push ‘off contract’ items, so they are not price controlled
But most will try to change the game
8. Supplier Management
Your business is a complex machine - and suppliers form a key part of it.
Partners respond if the incentives are right.
You need to devote adequate resources to managing suppliers
Make sure you have the right machinery in place to manage suppliers
There have to be realistic sanctions if suppliers fail to respond.
This is where Contract Management software can be important.
9. Staff Behaviour
Staff can drive additional cost through their behavior.
Rogue purchasingUnbudgeted purchasing
Over orderingPoor monitoring of ‘use by’ dates
Not communicating supplier failings
Expense Account Purchases
10.Management Behaviour
Many times management behavior, or lack of action, will be the cause of unnecessary or overpriced purchases. This is due to …
Not communicating procurement's role in strategy
Not producing policiesUnder resourcing procurementLetting supplier management meetings lapseAllowing stakeholder satisfaction reviews to lapse Not monitoring SLA’s and KPI’s
Authorising unchecked accountsAuthorising rogue purchasesAuthorising expense account purchases
Not monitoring purchases against budgets
Not demanding suppliers perform to their contracted performance levels
Remember, there is a time when thewisest course is to call for external help
Strategies
Low Value, Low Importance , Low Complexity
High Value, High Importance, Low Complexity
Use internal admin staff Focus for procurement team
High Value, Low Importance, Low Complexity
Low Value, High Importance , Low Complexity
Focus for procurement team Give users main responsibility
Low Value, Low Importance, High Complexity
High Value, Low Importance, High Complexity
Use external expert Use external experts
High Value, High Importance, High Complexity
Use top management team, Procurement, External Advisors
Low Value, Low Importance , Low ComplexityUse internal admin staff
Low Value, High Importance , Low ComplexityGive users main responsibility
High Value, High Importance, Low ComplexityFocus of procurement team
High Value, Low Importance, Low ComplexityFocus of procurement team
High Value, Low Importance, High ComplexityUse external experts
Low Value, Low Importance, High ComplexityUse external expert
High Value, High Importance, High Complexity
Use top management team, procurement, external advisors
Tools
1. Use Tender Management tools for RFx (Request for Tender, Request for Price, Request for Information , Expression of Interest) - improve productivity and reduce risk. 2. Use Contract Management tools for Supplier
Management
3. Use external experts for low strategic value but high complexity procurement
Pictures thanks to www.sxc.hu
For information on tender management and contract management tools, or for external support for better procurement, contact
1300 8600 63
Or go to our website at www.activecost.com.au
Sydney Richard Pitchforth, ph +64 (0) (413) 285 745Brisbane Peter Trandafilovic ph +64 (0) (414) 778 840