Is your business overpaying suppliers because of gaps in your buying cycle?
If you don’t know what to look out for, the answer is probably yes.
There’s no denying the cost of doing business is going up, but while some price hikes are unavoidable, the truth is there are always ways to reduce business expenses.
I’m a cost management consultant, which means people often think I come in with the goal of slashing headcount and cheapening the quality of products or services. What I actually do is look for the overpayments to suppliers based on industry benchmarks and identify the fees/levies you shouldn’t be paying for in the first place.
To explain more, let me walk you through the process of a typical buying cycle. We’ll use branded retail bags as an example.
Portrait of a business buying cycle
First things first, your business needs a packaging supplier for your business. You or your procurement team do some research, put out a tender and review the offers that come back. Then you make a decision based on the best value, commit to one or two suppliers, and put a contract in place.
The problem is solved; you have branded retail bags at a decent price. The supplier sends invoices so you can keep track of what your stores are purchasing. You keep an eye on spending but unless there is a huge anomaly, you’re unlikely to do more than take a quick glance at the invoices that come through.
After two years, your contract is up. It’s now time to renew, renegotiate or find another supplier to test the market, so you go through the same steps.
The problem with this process is that five essential pieces of information are missing:
- You have no industry benchmarks to help you figure out if you are overpaying, only what you last paid.
- You’re relying on the suppliers to give you a good deal and negotiate only comparing one against the other.
- You can measure your bag purchases, but you have no way to measure your supplier’s performance.
- Your supplier’s quarterly review, if conducted, doesn’t mention anything about measures to reduce your costs or about the price creep that occurred.
- You report a budget blow-out and can only attribute it to being under-resourced to monitor for changes in volumes or costs.
Yes, you have records of your spending, but the ‘gaps’ come from not knowing if you’re genuinely getting the best deal.
When you close the gaps in the buying cycle as the table below demonstrates, you’ll find you have the power to make significant savings.
Don’t miss out on ‘easy wins’
The reason many companies fail to plug the gaps in their buying cycle knowledge usually comes down to lack of time, lack of industry-based benchmarks and being under-resourced.
Here’s another example:
I’m sure you have seen those advertisements promising to review and reduce the cost of, for example, your health insurance. If you’re like most people, you don’t bother reaching out to the comparison companies because you don’t feel like it’s worth spending an hour or two on the phone in order to save $265 per year.
A lot of businesses apply this thinking to their buying cycle. They go with an ‘if it ain’t broke, don’t fix it’ attitude, or they prioritise other tasks for their team. What they don’t realise is that if they get the help they need, they will be saving a great deal more than $ 1,000’s a year. The reduced costs possible can add tens of thousands of dollars to your cash flow, which can go towards increasing market share, improving supply chain, funding R&D and/or anything in between.
If you were helping someone to save money for a home, you’d tell them the most important thing to do is review their regular expenses. Yet it’s amazing how many businesses have a ‘set and forget’ approach with their non-core suppliers. And even when they do assign the job of reviewing expenses to someone, that person usually isn’t a specialist in that expense category. As a result, a lot of details are missed.
There is one more point I want to make when it comes to minding the buying cycle gaps and reviewing the agreement you have with your providers…
…you don’t know what you don’t know
Coming back to the cost of doing business, yes, it’s going up. But that doesn’t mean you need to start paying more in every single area. This is where having specific industry knowledge really helps.
Let’s look at Printing, for example. Right now, prices are rising. Many suppliers are blaming the ongoing impact of Covid-19 on Supply Chains and paper shortages from striking workers in Europe.
But not everyone gets their paper from Europe. Australia is one of many in the APAC region that manufactures paper. So Australian companies should not be paying more for Paper due to the crisis in Europe.
As an indirect cost consultant with over 20 years of supplier experience, I often see the global economy being blamed for price increases. However, a 9% jump in the value of a product often results in a supplier adding 15% to its costs. Most people don’t question the change because they are told it is unavoidable.
When you are aware of all the relevant details in relation to a price rise, it is far easier to negotiate with your supplier. Again, the savings can run into the tens of thousands of dollars.
Want to know more about reducing indirect costs and maintaining a new cost baseline that is sustainable long term? Get in touch today.
Nick Staropoli is a Principal Consultant at Expense Reduction Analysts. He brings over 20 years of insider supplier knowledge to help companies identify where they’re overspending.
If you have any questions or feedback about this article, please reach out.
Nick Staropoli: 0476 676 468