Why You Pay Too Much

Why are you paying too much for overhead expenses?

Active Cost Management 2009

TIMES ARE GETTING A LOT TOUGHER

Businesses need to find every penny of savings to survive

No management can ignore the importance of cost management.

In fact, management is an important part of the answer.

Overhead expenses have often been overlooked, because they were considered too small to be important

But now every drop counts

Examples of Overheads(Only external purchases)

Freight & Couriers Advertising

Office Supplies Packaging

Telecommunications Labour Hire

Safety Gear Media Buying

Travel Cleaning

Print IT Equipment

Electricity Professional Services

1. Policy

2. Contracts

3. Reviews

4. Specifications

5. Procurement Standards

6. Procurement Processes

7. Supplier Push-Back

8. Supplier Management

9. Staff Behavior

10.Management Behavior

Ten Reasons You Pay Too Much

1.Policy - Common

Failings

No policy developed for procurement overall

Travel policy?

Couriers

?

Electricity Supply?

Freight Deliveries – Outward?

Mobile Usage?

Office Supplies?

No policies developed for individual expense categories

See our website for more information on ‘What You Need in an effective Cost Management Policy’www.activecost.com.au

2.Contracts - Common Failings

No contract in place

Inadequate contract

Contract lost

Contract in place, but terms are unclear to stakeholders

Contract not enforced

Expired contract

3. Why No Review?

No strategic direction

No benchmarks

No Service Level Agreement

No Key Performance Indicators

No Supplier MeetingsTo Discuss Service Level Agreement

No Reporting

3. Specification

No effective communication between procurement and R & D in design phase

Wrong technology chosen - not aware of changes

Oversize orders

Product requires greater inventory control

Unrealistic delivery times

Unrealistic delivery requirements

Over or underestimating demand

Poor understanding of intended final use of product/ service

Lack of knowledge of expense category and current trends.

Wrong choice of ordering channels

Wrong choice of delivery options

Inappropriate risk aversion

Lack of knowledge of supplier’s industry

Poor procurement standards

Lack of policies

Lack of management interest

Low level of procurement skills or experience

Lack of industry contacts

Poor or ad-hoc reporting

Under resourcing

Lack of KPI’s

Lack of benchmarks

Poor accountability to stakeholders and internal customers

(Duck for cover)

Lack of the required detailed knowledge of each overhead cost category

6. Procurement processes

Needs analysis

Market analysis

Rfx documentation

Evaluation of prospective suppliers

Bias in supplier relationships may occur because staff want to

favour family members

or friends

or in a few cases, they may even be on the fiddle

or frustrated in their work by internal politics

Inconsistencies in procurement can arise due to decentralised procurement centres, and duplication of activity

Evaluation problems

Implementation problems

7. Supplier push-back

Naturally, suppliers will try to change the rules

They may change the product or service

Change the backup or service level

Change the data

Or change their costs by redefining the product from this … to this

They may push ‘off contract’ items, so they are not price controlled

But most will try to change the game

8. Supplier Management

Your business is a complex machine - and suppliers form a key part of it.

Partners respond if the incentives are right.

You need to devote adequate resources to managing suppliers

Make sure you have the right machinery in place to manage suppliers

There have to be realistic sanctions if suppliers fail to respond.

This is where Contract Management software can be important.

9. Staff Behaviour

Staff can drive additional cost through their behavior.

Rogue purchasingUnbudgeted purchasing

Over orderingPoor monitoring of ‘use by’ dates

Not communicating supplier failings

Expense Account Purchases

10.Management Behaviour

Many times management behavior, or lack of action, will be the cause of unnecessary or overpriced purchases. This is due to …

Not communicating procurement's role in strategy

Not producing policiesUnder resourcing procurementLetting supplier management meetings lapseAllowing stakeholder satisfaction reviews to lapse Not monitoring SLA’s and KPI’s

Authorising unchecked accountsAuthorising rogue purchasesAuthorising expense account purchases

Not monitoring purchases against budgets

Not demanding suppliers perform to their contracted performance levels

Remember, there is a time when thewisest course is to call for external help

Strategies

Low Value, Low Importance , Low Complexity

High Value, High Importance, Low Complexity

Use internal admin staff Focus for procurement team

High Value, Low Importance, Low Complexity

Low Value, High Importance , Low Complexity

Focus for procurement team Give users main responsibility

Low Value, Low Importance, High Complexity

High Value, Low Importance, High Complexity

Use external expert Use external experts

High Value, High Importance, High Complexity

Use top management team, Procurement, External Advisors

Low Value, Low Importance , Low ComplexityUse internal admin staff

Low Value, High Importance , Low ComplexityGive users main responsibility

High Value, High Importance, Low ComplexityFocus of procurement team

High Value, Low Importance, Low ComplexityFocus of procurement team

High Value, Low Importance, High ComplexityUse external experts

Low Value, Low Importance, High ComplexityUse external expert

High Value, High Importance, High Complexity

Use top management team, procurement, external advisors

Tools

1. Use Tender Management tools for RFx (Request for Tender, Request for Price, Request for Information , Expression of Interest) - improve productivity and reduce risk. 2. Use Contract Management tools for Supplier

Management

3. Use external experts for low strategic value but high complexity procurement

Pictures thanks to www.sxc.hu

For information on tender management and contract management tools, or for external support for better procurement, contact

1300 8600 63

Or go to our website at www.activecost.com.au

Sydney Richard Pitchforth, ph +64 (0) (413) 285 745Brisbane Peter Trandafilovic ph +64 (0) (414) 778 840