By ADR North America
Contributed by ADR
In manufacturing industries the value of managing costs in the supply chain are obvious. However, that’s not always the case in industries such as financial service, where the focus is on revenue and rates of return. That is a shortsighted view, because a dollar saved with better purchasing has the same value to the bottom line as a dollar earned on an investment. In service industries, of course, the place to look for savings is in indirect spending.
Based on our own experience, it is not uncommon for banks to save 15% to 20% in major indirect spending categories when they apply disciplined approaches. The first place to look is generally information technology. Perhaps in the interest of providing data security, financial institutions often have made huge investments within their organizations to process information. Through mergers and acquisitions there may be significant redundancies in their systems that exist primarily because there wasn’t the will or the need to streamline. At the same time, advances have been quick in communications technology, and some institutions simply have not kept up.
This is the perfect time for organizations to review their IT requirements and analyze what makes sense to keep in house, and where there might be significant savings without added risk by updating and outsourcing.
Like many organizations that have facilities spread over a large territory, banks with branches around the country are prone to have inconsistent and costly variations in their indirect costs from location to location. There may be advantages in some cases to support local businesses that have deposit relationships with a bank, but they should be weighed against the leverage of buying in quantity for commodities such as office supplies. Institutions might gain operational benefits as well as cost savings from aggregating security services contracts.
Any organization that hasn’t embraced smart purchasing in its culture has to prepare itself for a successful initiative to reduce indirect costs. Here are five steps that can make a big difference.
Sell the program to senior managers. The purchasing function isn’t always regarded highly within financial services companies. Many high executives in finance do not understand the role purchasing plays in the company and don’t recognize the planning and preparation it takes to execute a successful indirect cost savings program. Successful strategies often have to cross boundaries between departments or locations. Purchasing managers alone may not have the clout to push new ideas across “turf” lines. In those situations it becomes paramount to set up a leadership or steering committee to steward, support and validate purchasing strategies throughout the entire organization.
Recruit cross-functional teams. Mid-level managers and professional staff are going to be implementing new practices that will require better communication, so facilitate that by setting up working groups from departments within the central location or larger divisions. Stakeholders who participate need to be selected on their purchasing knowledge and their influence over suppliers in the market. These teams can set goals and strategies while assessing risks that might derail efforts. Within categories of indirect spending there are likely to be “sacred cow” vendors. Cross-functional teams often can identify those situations and address them because they have the strength of a group and a set of fresh perspectives. However, they can only do so if senior management are sold on the purchasing initiative and have communicated clearly that incumbent suppliers must be able to compete with other suppliers in the market on price, service and performance. Capable incumbents will be able to respond because of their experience. Those that have been coasting through the relationship will have a harder time demonstrating their value.
Agree on metrics. The leadership team must agree on how it will measure the cost savings and their impact to the bottom line. Whatever measures are used should be reviewed on a quarterly basis and tied directly to category goals for items such as IT hardware and software, office supplies, telecommunications, travel, fleet cars and temporary labor.
Organize and use data. If the data you expect to use for metrics are not available, then the metrics will fail. You may need a specific team or an outside vendor to create a process for pulling data you need from general ledger accounts and more importantly, making sense of the data itself. There are data management companies capable of “cleaning” supplier spend databases, giving purchasing a more detailed organized view of spend categories.
Monitor and manage contracts. Once deals have been negotiated with selected suppliers for cost savings, contract management is key to assuring that suppliers will not raise prices over a specified period and that performance stays high. A contract management software program can be used to keep tabs on the terms of the contract as well as when the contract expires. That gives your team time to plan for competitive bidding and potential new savings.
Although the significant trend in manufacturing industries is to outsource more activities, service companies in times such as these ought to look at spending categories from both directions. Outsourcing often cuts overhead as well as operating expenses, but it pays to analyze outsourced functions to verify they can’t be done better inside the organization.
Finally, in the process of analyzing other business functions, it’s not uncommon to find ways to streamline the purchasing process itself. The best manufacturing and retailing companies in the world have recognized how skilled buyers working strategically have delivered great value to their bottom lines. Financial services companies and others with significant indirect spends can learn a lesson from their experience.
ADR North America, LLC is part of ADR International Purchasing Consultants, Ltd., a global consulting firm specializing in purchasing. ADR North America is based in Ann Arbor, Mich.
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