Eight ways to create procurement value

From supplier innovation, new revenues and marketing cooperation, procurement can add value beyond price negotiations.

Suppliers cannot always be the sole source of benefits, patching holes in your company's balance sheet with their funding.

That may be why the concept of strategic sourcing appeared, emphasising the early analysis of requirements to conduct negotiations with internal customers: on excessive volumes, pumped-up specs and overstated expectations. These negotiations are much more time-consuming and nerve-draining than the ones with suppliers. Here, the opponent is usually heavyweight and charismatic and can ‘blackmail’ buyers with operational disruptions, loss of revenue or damage to the brand. Procurement needs to persuade and manoeuvre using the tools of economics, psychology and internal politics.

Let us consider that the opportunities for strategic sourcing in your company are effectively utilised. What else can buyers offer their companies in terms of adding value?

Procurement frontrunners will participate in product development, conduct deep supply chain analysis, audit and optimise business models and production processes of strategic suppliers. Read the "Disruptive procurement: Reinventing and Transforming Procurement Function" by AT Kearney's team of authors, and you will realise how far is the horizon of procurement excellence.

However, there are some reasonably simple solutions to start adding value today:

1. Effective use of savings

Where are the millions of procurement savings claimed each year? Usually, nowhere. Accounting and classification of it may be incorrect, and savings in future periods are mixed with the results of the current fiscal year. The value of savings can be calculated from the supplier's first offer. Monitoring of actual consumption versus the RFx forecast may be absent. Finally, the savings might get spent on unplanned needs – the available budget needs to be utilised in full.

It is proposed to introduce several basic principles of savings management:

• Savings are measured against the budget
• There's a distinct bucket of savings applicable to the current fiscal year ("cash" savings)
• Reporting is approved by financial control
• Benefit realisation is monitored based on actual consumption (not forecasts!)
• Approved savings of the current fiscal year are deducted from a respective business unit's budget

Thus, you can achieve a real effect on the company's financial performance and materialise your procurement efforts.

2. Supplier innovations

Supplier relationships provide a unique resource - knowledge, experience and creativity of suppliers used for the benefit of your company, for example:

• Recommendations on quality improvement and cost reduction in the supply chain and product lifecycle
• Synchronisation 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 optimise the business model, production process and marketing strategy.

After all, the supplier, like no other, is interested in your success.

3. New revenues

Your supplier base is a bonus pool of potential customers. Most likely, they consume something similar to what your company produce, and perhaps your competitors are serving them that.

Of course, attaching suppliers to your products will be challenging, especially if your competitors are their customers, as well. But to get at least a portion of the supplier's budget is quite realistic. The supplier's commitment to purchase your company's produce should become a standard element of the negotiation strategy. In general, buyers should constantly tune their mentality to not only cutting costs but also generating new revenues.

The ways of transforming cost into revenue are specific to a company, market or industry, so let's provide just a few practical examples from the aviation industry:

• Outsourcing of inflight magazine, which resulted in the substitution of production cost with an advertising revenue share
• Renegotiation of an agreement with the travel agency to obtain a revenue share from online visa issuance to passengers. Previously, all revenues remained with the agency
• A variety of trade-in programs with manufacturers of computers and mobile terminals
• Sale of reusable or recyclable packaging, return of accessories and specific consumables in exchange for a credit note
• Yard sale of retired onboard products (such as dishes, cutlery, linens and blankets) to the suppliers and staff
• An open auction for the sale of corporate vehicles having reached the maximum mileage.

4. Offloading balance sheet

Obsolete and faulty equipment, not allocated 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. Identifying them, sorting by usability, determining the book value, and preparing for sale or disposal - this is an incredibly complicated process that few people want to deal with. Procurement and supply management would elect to offload the company's balance sheet, optimise warehouse space and associated costs, obtain additional revenue through the sale of potentially valuable assets.

The financial benefit of this process sometimes exceeds traditional procurement savings.

5. Barter

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 stocks or reduce bad debts.

You can also employ specialist companies offering, for example, air tickets, hotel rooms and advertising assets in exchange for barter currency.

You can use barter as a tool to attract new revenues and offload the balance sheet.

6. Marketing cooperation

Any large company has significant marketing assets, for example, a website and social networks, regional offices or points of sale, or even a fleet of vehicles. The critical component is the clientele, thoroughly studied and classified.

Marketing assets can be offered to suppliers for advertising, brand promotion and targeted campaigns in exchange for revenues, discounts or similar support to promote your brand.

For example, having a large fleet, the 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 limitless.

7. Preferential buying

You can factor preferences in the tender evaluation, for example, by allocating 10-20% of the commercial rating to it. Thus, your company will realise its social responsibility and improve its public image.

Suppliers who are customers or marketing partners of your company and generate significant revenues can also receive some preferences. Undoubtedly, your long-term strategic partners should enjoy some recognition in regular tenders - the main thing is that it is not based on a subjective assessment of an internal requestor but clearly reflected in the tender evaluation.

8. Additional staff motivation

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. Employment benefits often include staff discount programmes.

The above examples demonstrate that procurement can add value not only through traditional price negotiations. The revenue increases, the image of the company improves, the relationship with suppliers is strengthened, and the brand is promoted - all thanks to the comprehensive professionalism of the buyers.

Sergii Dovgalenko FCIPS, is a CEO Advisor at Etihad Water & Electricity, UAE.