Procurement Cost: An Under-Managed Treasure Chest

March 22, 2012
An organization that wants procurement savings must be willing to embrace new procurement technology.

The cost of procured goods and services represents between 25% and 60% of a company’s total operating expenses. That is true for nearly all businesses according to Bain & Company’s survey of executives across a broad range of industries.

As stated in “A Fresh Look at Procurement,” Bain’s January 2012 report based on its own survey findings, the evidence is clear that procurement is a management process that is ripe for improvement. “We recently surveyed executives about their experience with past procurement-management initiatives. While most reported annual gains in their efforts to save, 72% of the respondents believe that they could do substantially better. Interestingly, this belief was held as frequently by the heads of procurement as it was by CEOs and CFOs,” the report’s authors stated.

Most organizations under-manage procurement, and I agree with the authors that procurement is a “corporate treasure chest” of “found funds.” Unlocking those funds requires three commitments. First, C-level officers have to accept the fact that traditional procurement methods are antiquated and will not lead to greater procurement savings. Second, organizational leadership and procurement staff must come together to adopt new, corporate-wide approaches to achieving procurement savings. And finally, an organization that wants procurement savings must be willing to embrace new procurement technology.

One technology that is garnering an average of 42% in savings for procured goods and services for its licensees is automated vendor selection (AVS). AVS is a 180-degree change from traditional procurement. The main differences are:
(1) The buyer is in control, not the vendor or a third-party broker.
(2) The buyer knows that regardless of pricing any of its own objectively qualified vendors will deliver a quality product on time.
(3) Vendors are carefully prequalified by the buyer and entered into a computer database along with details about each vendor’s capabilities.
(4) Detailed job specifications are entered into the computer, which then are used to match against vendor capabilities.
(5) Only vendors qualified to do the job are invited to bid on the work.
(6) All vendors remain in the system to be considered for other jobs.
(7) A competitive bidding environment is established in which vendors know that the low bid typically wins.
(8) Most often vendors submit deep-discount bids by scheduling the work to fill otherwise unused production time.

Two distinct advantages of this procedure over other procurement methods are: (1) The buyer’s vendor options are increased significantly; and (2) A fair bidding structure eliminates awarding jobs to the same few vendors, job after job, without huge pricing discounts.

As a matter of fact, AVS broadens most buyer databases from a handful of vendors to national and world-class resources – all willing to compete and offer discount pricing of 25% to 50%. Further strengthening this new approach is a secure, web-based communications and workflow system that streamlines communications among all buyer and vendor stakeholders (no more e-mails), documents and archives every detail from planning through production, establishes full accountability for all involved, and provides 100% transparency. Quality controls are enhanced, too.

Traditional procurement methods, such as negotiated pricing and reverse auctions, cannot unlock the procurement treasure chest that the Bain study identifies. You have to use the right key to unlock those untapped margins – savings that could add 1% or more of gross revenues to your bottom line. New procurement technology is the answer for any organization faced with ever increasing cost pressures and pricing volatility.

William Gindlesperger is the chairman and CEO of e-LYNXX Corp., which holds the patent for the automated vendor selection procedure, a technology that is integral to e-commerce and optimizes cost reduction in the procurement of all custom and specification-defined goods and services.