By: Ed Flanagan, Director, Expense Reduction Analysts

January 18, 2016 11:00 am EST
Cost Cutting

Most companies are leaving 10-30% on the table in operating expenses. Savings opportunities exist in telecom, printing, office consumables, couriers, freight, merchant card fees, packaging, insurance, records management, food service, payroll processing, waste management, janitorial, packaging, factory consumables, and across many other P&L line items.

The Problem

Most corporate managers believe they do an excellent job managing expenses, but most of them are surprised when they discover that they continue to leave significant dollars on the table across a wide array of large expense categories. This observation is based on 18,000 engagements by over 700 expense reduction consultants, where opportunities for these operating cost savings are validated every day. 

The Reasons

There are many reasons companies overspend between 10–30% or even more on operating expenses. Fortunately, recovering those expenses can occur without sacrificing supplier quality or service. However, doing so does require beginning with an understanding of why lacking critical knowledge and holding misconceptions can exacerbate the problem:

  1. Benchmark Data/Insider Knowledge in All Cost Categories:  First, a supplier’s goal is to win all business possible, at the highest price possible, and make it difficult for the buyer to obtain the lowest price. It takes insider knowledge in each of your suppliers’ industries to determine the best deal, and buyers rarely have that level of visibility or expertise, but it is likely impractical to dedicate the time and resources required to establish these perspectives in each strategic cost category. As such, most companies lack the critical benchmark data that would provide a clear frame of reference for optimal price negotiation.
  2. Detailed Industry Knowledge:  To capture the cost recovery opportunities that we identify in this article, you must go beyond general best practices in procurement. Buyers must start by taking full advantage of the idiosyncrasies in all of their suppliers’ industries. You may know your industry inside out, but that’s just not where the money is when it comes to negotiating with suppliers—the money lies in knowing each of THEIR respective industries.
  3. Strategic Raw Material Knowledge in Depth:  If you’re a manufacturer, you might already fully understand the market idiosyncrasies for a specific strategic raw material in your value chain. However, it’s typically difficult to justify the time it would take to master the specifics of all the raw materials that affect the products you procure in most of your other expense categories. Similar to the discussion above, understanding the raw materials markets in depth that affect the products you procure is a critical baseline perspective to use when negotiating prices.
  4. Knowledge of Currently Available Prices and Terms by Industry:  Most procurement groups just don’t know what prices and terms are potentially available in many industries, and those factors change constantly. This information can be difficult and time consuming to obtain. But it is critical if you hope to target the contractual terms that will yield your company the lowest costs.
  5. Group Purchasing Organization Volume Purchasing Leverage:  Negotiation leverage is often limited to the volume of your company’s purchases. That’s why group purchasing organizations, GPOs, are attractive to many companies; GPOs can aggregate a collective volume that provides better negotiating leverage. Although GPOs do offer some savings, there are far more effective ways to negotiate better deals then participating with GPOs.
  6. Knowledge in Best Practices and Behaviors of Specific Suppliers:  Finally, the number one reason companies overpay suppliers is because procurement professionals hold many misconceptions and false assumptions about current best practices and supplier behaviors. When companies rely on these inaccurate vendor and industry frames of reference, they are doomed: the best prices possible will forever elude them.

THE SOLUTION > Continued . . .

expense reductionbest practicessupplier negotiationsuppliers
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