Securing unexpected cash is rewarding. Furthermore, the real value can be the ability to invest in initiatives that might not be fulfilled without the additional cash flow. If your organization is taking the initiative to find savings, it’s important to understand the distinction between techniques required to find additional savings and techniques used to ensure sustainability over the long term.
If your organization can use some incremental cash, here are some tips to ensure the benefits derived from your investments are realized on a sustained basis.
1. Think beyond the RFP
If the real value is the benefits derived from how the cash is used, it is more than an RFP. The process becomes an organizational initiative requiring total alignment throughout all levels of the organization. There are often multiple stakeholders and touchpoints that can be impacted by the outcome.
To ensure the best outcome in obtaining sustainable cost savings, it is helpful to outline the strategic values and benefits for the organization. Establish an organization-wide initiative (for example, the organization needs money to allow us to fund X initiative, which will benefit us as follows ….). This may require finding cash in multiple areas to meet the need, thereby making organization-wide alignment critical. Additionally, sustained savings over the long haul allow organizations to engage in future initiatives.
The next step is to understand your specific spend profile to the lowest level of detail possible. When this task is achieved, most organizations are surprised by “what” and “how much” they buy. They are also surprised by how many suppliers they buy from, when, and who is doing the buying. This deep level of understanding is important for the following reasons:
- Existing suppliers now realize that you know as much about your business as they do. It levels the playing field.
- It provides complete transparency for new suppliers which allows them to lower margin “cushion” and provide better terms associated with unknown risk. This is a very important step to get the extra cash that would most likely not be found.
- It is a key driver of sustainability. Suppliers recognize that you are on top of your game. Because of that, you are likely to get more attention and support throughout your business relationship.
2. Seek out extra sources of cash within your supplier contract
Extra cash savings can be found in multiple areas “within” a supplier contract. Each supplier industry has distinct terminology, cost and margin structure, and unique ways to increase margin. The same is true for suppliers within the same industry. Margin increases can be hidden in the contract under review and may occur immediately or over time. Therefore, as the terms are being set, having knowledge about how suppliers secure their margin is very important.
Savings can come from many areas within a contract including (but not limited to) pricing, contract term, market basket structure, “on-contract” vs. “off-contract” items, and applicable discounts or rebates. Additional savings come from improved organizational processes and procedures. Outdated processes and procedures are another way for suppliers to build in some additional margin.
3. Be aware of industry changes
Industry changes can have a significant bearing on cash. For example, a company was proud of the fact it didn’t have a price increase in five years. However, they did not know about the significant advancements made within the industry. While there was no increase in five years, the company was paying 71% more than the market rate. This represented a significant lost opportunity for extra cash.
Deep industry knowledge will avoid these pitfalls and lost cash opportunities. Otherwise, the organizational initiatives and benefits derived from them may be in jeopardy.
4. Complete a thorough evaluation of market responses and focus on implementation
Once an offer has been received and accepted, timely implementation is a key next step. Prepare to take advantage of the offer before it expires. There may be sound business reasons to request an extension; however, these should be avoided if possible.
Once implemented, it’s time for a regular and thorough review of purchases and supplier charges. Understanding what to look for and what it means is important. Look for unknown fees or charges and question them. An unintentional pricing error will surface over time, so it is important to make sure it doesn’t occur for high volume purchases. SKU and unknown process changes can also be identified through a thorough invoice review if you know what to look for. An invoice review will correct or greatly enhance the chance for your organizational initiative to be met. The organization is counting on the cash, so it is important to know if it is being realized to the fullest extent possible. Key stakeholders and touchpoints in the organization should understand how their actions may positively or negatively impact the cash objective. It will take a collaborative team effort.
Regularly review current processes, across departments, to make sure that they are being done as efficiently (and cost-effectively) as possible without jeopardizing quality or service. Continually encourage staff to find efficiencies that can lead to savings. Organizational silos can naturally occur and are often unintentional. However, they often lead to leaving significant cash on the table.
5. Establish meaningful KPI’s and measure over time
Monitor key performance indicators (KPIs) throughout the term of the contract. This will ensure the organization realizes the cash on a sustained basis. Monitoring and trending KPIs will identify a change but determining the value of the change or appropriate corrective actions depends on a deep understanding of all the cost drivers captured within each KPI. In addition, if the organizational need comes from multiple areas, it can be a challenge to know what specific KPIs to monitor for each supplier contract you may have negotiated. Deep organizational knowledge and expertise within your organization is important to understand and monitor KPIs.
By continuing to monitor your organization’s cost-savings efforts over time, you will reduce the chance for price creep. Your organization will be able to drive organizational benefits from the extra cash now and into the future.