How many clients with indirect spend do we run across that conduct strategic sourcing, develop pre-negotiated contracts, and implement savings plans that can’t get those savings flow to the bottom line? Answer: all of them.
When it comes to locking in cost reductions from hard-fought sourcing engagements, companies don’t just identify opportunities, but rather they implement savings. Here are 5 tactics to drive compliance and benefits to the bottom line:
- Engage directly at the plant level. Whether center-led or decentralized, any new contracts that drive cost savings across the business need to be articulated at the local level. As an example, plant management with direct profit and loss (P&L) responsibility will make adherence with new suppliers and pricing terms a requirement if they easily understand the benefit to them.
- Load new pricing immediately into your P2P system. In a well-maintained catalog environment, pricing will have expiration dates, new pricing should be updated immediately, and any subsequent request for similar materials or services should be driven by buyers (who are involved on an exception basis only) to the newly contracted rates.
- Verify that pricing negotiated is the price received from supplier invoices. Although doing this manually can be painful, it is not uncommon for suppliers to mistakenly continue to invoice old prices. In an electronic invoicing environment, particularly one with 3-way matching, this is made all that easier.
- Require all spend to go through your P2P tool. Any rogue spending, with very few exceptions, should be addressed immediately and with consequences for the employee and their management.
- Implement budget controls (and dynamically change them when you get cost savings). Most employees will do the “right thing” if provided timely and accurate information. Knowing where you are relative to your budget prior to making new material or service requests has been shown to result in fewer budget overruns. Changing budgets dynamically further locks in controls at a cost center level.
Our clients choose to operationalize some of these, and in some cases all of these. It depends on the importance of cost reduction to the bottom line and the metrics and success criteria put in place for the procurement organization.