Procurement managers and organizations naturally cite savings from suppliers as the top way they add value to the enterprise.
But those opportunities eventually dry up, and new value sources need to be found. So says Sergii Dovgalenko, head of procurement at Etihad Airways, in an interesting recent piece for the UK's SupplyManagement web site.
Supply Chain Digest Says... |
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| In general, the mentality of buyers should be constantly tuned to not only cutting costs, but also to generating new revenues. |
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After additional savings opportunities run dry, as eventually also will happen with stretching out payments to suppliers to improve the company's cash flow, many procurement organizations turn to strategic sourcing practices, Dovgalenko says. This approach in part emphasizes the early analysis of requirements to conduct negotiations with internal customers on excessive volumes, pumped up specs and overstated expectations.
These internal negotiations can often be more tense and difficult than working with outside suppliers, Dovgalenko writes.
But let's say strategic sourcing is also well in place – where can procurement managers turn next?
Dovgalenko offers eight interesting ideas, which we summarize below:
1. Effective Use of Savings: Where are the millions of dollars of procurement savings claimed each year? Usually, nowhere, Dovgalenko. They are hard notoriously difficult to calculate and track. He proposes several basic principles of savings management:
• Savings is measured against the budget
• There's a distinct bucket of savings applicable to the current fiscal year ("cash" savings)
• Reporting is approved by the finance department
• Benefit realization is monitored on the basis of actual consumption (not forecasts!)
• Approved savings of the current fiscal year is deducted from a respective business unit's budget
2. Supplier Innovations: There are many ways supplier knowledge and innovation can be leveraged to a company's benefit. Those include:
• Recommendations on quality improvement and cost reduction in the supply chain and product lifecycle
• Synchronization of roadmaps between your company and the supplier, so that their innovations immediately contribute to your product
• Business consulting, which suppliers are ready to provide free of charge or at a minimum rate to help your company optimize the business model, production process, marketing strategy, etc.
3. New Revenues: Often, suppliers consume something similar to your company's products, and perhaps are served by your competitors, Dovgalenko says. While attaching suppliers to your products will not be easy, especially if your competitors are already their customers, to get at least portion of the supplier's budget is nevertheless quite realistic. A supplier's commitment to purchase your company's products should become a standard element of the negotiation strategy, Dovgalenko says.
In general, the mentality of buyers should be constantly tuned to not only cutting costs, but also to generating new revenues.
4. Offloading the Balance Sheet: Obsolete and faulty equipment, unallocated marketing materials, stands from past exhibitions, materials with an old brand - all these are tons of dead weight and millions of dollars on the balance sheet of the company, Dovgalenko says.
Identifying them, sorting by usability, determining the book value, preparing for sale or disposal - this is an incredibly complicated process that few people want to deal with. Procurement and supply management can lead the process and generate additional revenue through the sale of potentially useful assets.
The financial benefit of this process sometimes exceeds traditional procurement savings, Dovgalenko says.
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5. Bartering: Dovgalenko says you can barter any product or service produced or consumed by your company to eliminate sales, distribution or marketing overheads, and, most importantly, save cash. You can grow the client base, sell off dead inventory, or reduce bad debts.
There are a number of firms specializing in the barter process, Dovgalenko notes.
6. Marketing Cooperation: Dovgalenko says almost any large company has significant marketing assets, such as websites and social networks, regional offices or points of sale, even a fleet of vehicles. The key component is the clientele, thoroughly studied and classified. Dovgalenko says marketing assets can be offered to suppliers for advertising, brand promotion and targeted campaigns in exchange for revenues, discounts or similar assets to promote your own brand.
 For example, if a company has a large fleet of company-owned cars, a company can conclude an agreement with the automaker and lease cars of its brand with a significant discount, as they will be part of the marketing program. In the airline industry, manufacturers are willing to pay airlines for the opportunity to serve their products (beverages, snacks and cosmetics) or branded napkins and cups to the passengers. You can co-brand a small outsourced warehouse or sell the name of a metro station, stadium or aircraft – "the possibilities of marketing cooperation are truly limitless," Dovgalenko argues.
7. Preferential Buying: All over the world, there are programs to support small private entrepreneurs, war veterans, local crafts etc., and this is a social obligation not only of the state, but also of large companies. Dovgalenko says companies can factor preferences in procurement, for example, by allocating say 10-20% of the commercial tender rating to it. This helps a company realize its social responsibility and improve its public image.
8. Additional Staff Motivation: Dovgalenko says procurement can provide additional tools to motivate staff. For example, corporate travel discounts on air tickets and hotels can be extended to private travel of company personnel and their families. Your suppliers can provide offers to your staff or set up a temporary sales point in your office.
In some companies, there are sections of a corporate website with special offers from suppliers, and discount cards are issued. The staff discount program is specified in the employment contract, as one of the benefits provided to employees.
"The above examples are meant to demonstrate that procurement can add value not only by traditional price negotiations," Dovgalenko concludes. "The revenue increases, the image of the company improves, relationship with suppliers is strengthened, the brand is promoted - all thanks to the comprehensive professionalism of the buyers."
What do you think of Dovgalenko's ideas? Anything to add? Let us know your thoughts at the Feedback section below.
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