The best way of saving money for your organisation is not to spend anything at all. But if no-one buys anything then nothing will be made or done to service customer requirements. The usual reality is that stakeholders will have demands that may not be in line with customer requirements. If the stakeholder demand is too low, the customer will perceive the end product to be low quality and if the stakeholder demand is too high, the customer may not be prepared to pay the price that that quality would normally deserve.
This is a particular problem for companies engaged in high-end engineering that have extreme sensitivity to safety issues. What we commonly observe is that the need for high specifications starts to creep into other, less critical buying decisions. That is why demand management is a critical tool in your toolkit.
Procurement can be invaluable by working with stakeholders to ensure that specifications are fit for purpose, while not being excessively costly. An associated issue is design proliferation.
For example, it used to be common in the aerospace industry that each designer would have their favourite components that might have appeared in the latest engineering magazines. This vastly increased the cost of manufacture, certification made it difficult to change any of these components, leading to increased long term maintenance costs for the customer. These practices have largely disappeared due to the fantastic work done by many procurement professionals in the last 20 years and has established as normal practice that procurement work closely with designers and engineers in these companies.
Price vs Service
But similar techniques can be used across other areas of spend to ensure that the best prices are sought from suppliers while stakeholders receive the required service.
An example is a client who had contracted out for plant maintenance services. This 24/7 contract had an agreed three hour lead time for emergencies. But no-one had checked to see how far away the nearest supplier depot was located. It turned out that although the technical service was acceptable, the quickest an engineer could get on site was in four hours. This made for an extremely unhappy plant manager.
But procurement’s role is not complete at the stage of specification. At one client, the local procurement staff used an RFP to get the best prices on 200 commonly used stationery items. The contract was then awarded to the winning supplier, and the following year expenditure on stationery rose by 27%. It turned out that the contract was to be driven by the supplier’s online catalogue but had not been restricted to just the 200 items agreed to in the RFP. People weren’t just buying writing pads and pens, but fountain pens, scientific calculators, and even monogrammed brief cases! It was a genuine surprise to everyone what had happened and the supplier had not behaved maliciously. It was just that an important loophole had not been closed.
Thankfully, in this case the error was quickly corrected, but not after wasting all the savings that the original contract was due to generate…