How to Bell the Risk & Build your Savings in Procurement?
Remember the elementary fable of “Belling the Cat,” in which a group of mice decide that they will bell a murderous cat so that they are warned of its presence? Quite an arduous task. Now if you are curious about the result, please look up and you’ll know how that act of belling the cat is relevant in this topic of procurement savings and risks being discussed below.
The analogy is simple. Take the murderous cat for risks that you need to be warned of so that your savings are safe and not penalized in any manner. In Procurement, it is a tough task to harness a bell to your risks, but we have ways for you to establish this goal.
To begin with, let’s talk about the savings aspect in Procurement. Why is it important for Procurement to be concerned of savings? Well it is important because the scope of procurement has now grown bigger than before. It has a wider financial responsibility to play beyond simply identifying vendors from the market and sourcing supply to cater to the organization’s requirements.
If you are worried about Cost Savings in your organization, be assured that there are many organizations dealing with the same. According to Zycus’ “Pulse of Procurement 2018” annual research report, 54% of procurement leaders prioritize Cost Savings as their key-focus area.
Cost saving methods and approaches also differ by spend categories. For example, if the current category cost is known and the new price is lower than the known price of the existing category, then the value is clear. But if we reverse the scenario, wherein the current category (a new product, service or technology) cost is not known, an organization must devise an approach to capture both cost savings and cost avoidance.
Ways to Identify & Capture Savings 🔒
Here are 5 steps in which organizations can identify as well as act upon the opportunities in the categories that have less visibility within an organization because of historical mismanagement, usage of too many suppliers, and procurement of these categories at higher than benchmark prices.
- Mine Procurement Information
- Classify/Categorize Procurement Information
- Identify Opportunities
- Execute Identified Opportunities
- Calculate your Savings
Cost Savings = (Baseline Price – New Price) x Estimated Quantity
Now that you know about the process to build your savings, let’s look at a few supplier-related risks that may pose threat to your savings.
- Supplier’s failure to secure trade finance results in additional costs of finding a new supplier
- Compromise in quality leading to product recalls that affect sales and the top line
- Gradual decline in supplier performance (cost, service, response time) increases production & delivery overheads
- Supplier’s failure in supporting new product/services delays delivery and impacts sales
- Sudden increase in price, refusals of order, or even cancellation of existing contract to command new pricing are unjust costs to any organization
- Lack of transparency in supplier practices to cover for violations of immigration law, sweatshop conditions, untenable tax evasion or environmental hazard incur litigation costs
- Loss resulting from theft of sensitive/private data from supplier’s end is certainly a financial damage
So how do you bell the above mentioned potential risks so you know when they are likely to impact? Below mentioned are-
5 Steps to Mitigate/Manage Risks that affect Procurement Savings 🔒
- Cross-functionality of Risk Management
- Aligning Risk Management Activities
- Leverage Supply Chain Intelligence
- Risk Mitigation Preparedness & Contingency Planning
- Track Progress of Changes Implemented & Benefits Realized
So now you can see how human species are reasonably labelled the most intelligent of all? Now we can safely conclude that if not unachievable, assessing unstudied risk-factors that procurement savings is often prone to, is not easy without the right implementation of technology and strategy that we have discussed so far. We leave it to your clever instincts to find the right partner that’ll make your procurement a real success.
Areas marked 🔒 require further reading. For full content, download whitepaper here.