How can Procurement go from a cost center to a function that creates value?
It’s not only about cutting costs; it’s also about removing tedious work from employee workloads, empowering them for higher-value work. It’s also about helping to ensure the company’s supply chain is robust and delivering the inputs you need on-time. In addition, there are also various cost-cutting techniques to increase your working capital.
In our last article we wrote about the idea of using procurement processes to be a strategic partner to the business. In this post, we’ll quickly highlight five value levers for optimizing your procurement process.
Where do we find value in Procurement?
Cutting costs
Working capital optimization
Employee productivity
Supplier reliability and relationships
Compliance
Let’s explore these in more detail.
1. Cutting Costs
There are three main approaches to cut costs out of procurement processes:
Using discounts
Eliminating double payments
Consolidating suppliers
We see many clients miss early payment discounts because their workflows are still paper-based, manual, or otherwise inefficient. According to recent P2P research, “Some 70% of companies participating in the Zycus P2P Benchmark report achieving something less than 60% compliance in terms of actually booking all potential volume or early-payment discounts and rebates negotiated and contracted for by procurement.”
For example, Deutsche Telekom captures as many as 96% of discounts. Using AP automation helped Fresenius Kabi realize 90% of cash discounts, up from 61% before automation. You can read more about it here.
On the purchase side, creating an automated early payment plan can enable a company’s smaller suppliers to improve cash flow – assisting them to efficiently manage their cash flow in challenging economic times and providing an element of redundancy to a business’ supply chain.
Automating the accounts payable process with intelligent automation tools (such as intelligent document processing and workflow) permits AP departments to process invoices quicker and more accurately. That allows procurement departments to take advantage of early payment discounts.
Similarly, identifying double payments with specialized AI-based tools or process mining is the first step to ending them. While not a huge opportunity – most companies have less than 1% rate of double payments – there’s no reason to ever pay a supplier twice.
Supplier consolidation has historically been a way to reduce procurement costs by reducing the number of suppliers. The previous two years of upheaval in supply chains caused by the pandemic has led companies to rethink how much consolidation is too much. Still, consolidating suppliers simplifies administration (fewer invoice varieties, for example), better discounts, and even lower freight charges by finding suppliers close to you or by shipping in larger volumes.
There are “soft” benefits to supplier consolidation as well, such as stronger relationships with a smaller number of suppliers as well as more flexibility in service and support.
2. Working Capital Optimization
Procurement can help keep more cash on hand by minimizing early pay and negotiating better discount terms.
While companies should take advantage of early payment discounts, there’s no value created to pay before the due date. Configuring accounts payable processes to pay on the due date, not beforehand. Companies still take advantage of early payment discounts, while maximizing working capital.
Procurement teams should also be continually searching for better discount terms. Advice from Procurious includes:
Develop strategic supplier relationships – treat suppliers like partners and keep asking them “what can we be doing better”
Don’t send a demand letter asking for a discount – this smacks of arrogance; plus, pricing out smaller suppliers can decrease competition, which will inevitably raise costs
We’ve written about business execution gaps and how closing them increases working capital. The article can be found here.
3. Improve Employee Productivity
Freeing up employees’ time to focus on higher-value work through automating purchase orders (and invoices) and 3-way match. Taking the time to identify the root causes of PO issues prevents the same problems from reappearing.
Automating 3-way match is also a simple (in concept if not always in reality), quick way to prevent fraud. Manually matching purchase order, receipt of goods, and the invoice amount can prevent this type of fraud – and also simple over/under-payment caused by PO/invoice mismatch. Automation is better.
Here’s an eye-catching instance of fraudulent billing that automated 3-way match could have prevented. In 2021, someone sent falsified invoices to Facebook and Google and was paid $123 million for services neither delivered nor requested. While both companies recovered the bulk of their bilked funds, invoice fraud happens to businesses of every size and costs hundreds of millions of dollars yearly.
Not only can 3-way match prevent fraud, it’s also a good strategy to help cut costs.
Automating purchase orders eliminates the manual steps of filling out, printing, emailing, or filing. Manual processes are prone to human error. These processes are also time-intensive and prone to bottlenecks at every stage of approval. Benefits of automated POs include:
Easier scalability – no need to add head count
Fewer errors – People make mistakes in data entry
Save time/money – Reduced errors save time/money, automation also allows your team to focus on meaningful work
Reporting visibility – with data centralized, you have complete transparency
4. Supplier Reliability & Relationships
An optimized procurement process allows executives to identify the most dependable suppliers – who has the fewest price and delivery data changes, for example.
With information about the most reliable suppliers on hand, executives can focus their time on developing relationships and partnerships with their most valuable suppliers. In turn, stronger relationships can help companies uncover opportunities for better discounts as well.
Procurement departments will also be able to improve their ability at demand forecasting. By centralizing data and systems, companies will be able to not only identify historical patterns based on the calendar (Thanksgiving and Christmas, for example), but also align with marketing and other internal factors to identify how sales and marketing activities could cause spikes in demand.
5. Compliance
Companies struggle with maverick spending and detecting fraud when procurement processes aren’t optimized.
Maverick spending can cause multiple problems like:
Increased costs by purchasing from vendors without a negotiated contract. A procurement team could have negotiated a 30% discount from an office supplier. When someone goes rogue and buys from a different supplier, that decreases volume with a company’s preferred supplier (which, over time, could cause them to attempt a renegotiation at a smaller discount) and, obviously, they’ll pay more.
Operational risk from unauthorized vendor purchases. For example, an uncertified spare part in a piece of machinery which could lead to breakdowns.
Procurement fraud is real and affects nearly all businesses.
The average organization has reported losing at least 5% of its annual revenue to fraud each year. Thus, causing a median loss of $117,000 before being detected. [For more procurement fraud statistics, click here.
For tips on preventing procurement fraud, read this article.
Ready to Get the Most Value From the Procurement Process?
Our next post will focus on establishing a value framework across three areas: process, technology, and operating model.
But why wait?
Doculabs can identify your procurement process gaps. We do this with a “Report Card” approach. It’s an X-ray of your current data based on a combination of Doculabs' industry expertise and process mining from Celonis to:
Diagnose how well core processes are performing
Provide an executive summary report that includes process improvement recommendations to help you budget for 2023 and beyond