How Do You Know You Are Getting a Good Deal?
Three simple questions to ask your procurement team when validating business costs.
By Reid Nahm & Brian Thorngate
Effective Supply Chain Management is hard. It requires defined requirements, strong data analytics, accurate demand planning and an engaged supply network. Add in some complicators such as inventory positioning, global logistics bottlenecks, and sporadic trade wars and Supply Chain Management becomes quite the challenge.
The “old school” supply chain dictated that effective cost validation can be accomplished by getting three quotes and either going with the lowest total cost quote or negotiating down to the lowest quoted cost.
- This “three quote” technique has tarnished over time with the advent of directed strategic commodity spend and the simple reality of having to address more ground with fewer resources.
- This convergence of supply chain strategy and tactical fulfillment often sacrifices the ability to call a time-out and ask the fundamental question: How do you know that you are getting a good deal?
3 Questions To Ask Your Procurement Team When Evaluating Costs:
One of the questions most asked by Impendi clients is how to evaluate their procurement teams within their organizations. How can a leader be sure that their team is doing everything possible to optimize cost? Although there are many levers to deploy and methods available to validate pricing, start with these questions within your organization:
1. When is the last time this spend category was competitively sourced?
- Large organizations are especially susceptible to spend leakage, where a divergence exists between contract-approved spending and spending that exists outside of your pre-approved suppliers.
- Are you confident that there have been no price increases since your last contract with the vendor? Do your invoices match your price tables/contracts? Has your team competitively bid/sourced each spend categories within 2 years?
2. When is the last time a disruptor has been introduced to validate true market pricing?
- Comfort Complacency – often there is a natural bias within the ever-changing world around purchasing professionals to just stick with the status quo. Over time it is easy to fall back upon the comfort of known suppliers and known relationships. We have also seen organizational fear of failure leading to a resistance to change. Suppliers recognize the value of procurement complacency and cherish the thought of not being held to a competitive market standard.
- When is the last time you invited a new supplier to bid an RFP for each spend category?
3. How are freight, logistics, and handling accounted for in the costs?
- Be on the lookout for hidden fees within freight, logistics, and handling. Often these costs are in addition to the quoted costs that seem to hit your invoice.
- Deeper dive: How are accessorial charges agreed to & accounted for during invoicing?
So, how did your procurement team fare with the above questions? Are you confident that you are getting the best deal?