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Driving Savings with Supply Chain Support?

Its seems almost daily we read an article about “unlocking innovation within the supply chain”, “driving supplier collaboration” or “procurements evolution to business enabler”, yet regardless of the rhetoric the reality is you’ve still got a savings target to hit. Whilst savings remain the focus of attention the other aspects are put in the “nice, but not today bucket”. In this article we will challenge that perception, we will show you a way to achieve savings, drive innovation & collaboration, unlock procurements evolution and it only requires a little knowledge with a desire to become more.

The knowledge I will offer, the desire has to be yours.

Over the past few months we have seen many Procurement initiatives such as “The Procurement Revolution” run by Buyers Meeting Point & The Art of Procurement or “The Career Boot Camp” run by Procurious. Underlying agendas behind these initiatives are to provide procurement with knowledge and options on its direction of travel which for many is currently leading towards higher levels of automation with fewer procurement jobs. Yet, with just a few simple but effective changes procurement has the opportunity to become a highly valued and trusted advisor to the business, gaining not just in reputation but also business value.

In preceding articles we have looked at the (re)structure of procurement and how we might be able to drive a different culture within the organisation with procurement taking a central lead in driving business success. Its nice to talk about these ideas but right now procurement has bigger challenges around savings, we seem to be stuck in a catch 22 situation. To understand the dilemma and identify a potential route forwards lets review how procurement currently generates contract savings and what an alternative future could look like;

1) Negotiating Savings

Everyone is familiar with the tried and tested method of negotiating a discount from the supplier prior to awarding the contract. For many procurement organisations the savings negotiated are reported into the business as part of procurements target, for some it might even result in a bonus salary payments. The challenge for Procurement and the CFO alike is that the savings are not really tangible, thereby limiting the value the business can place on this type of saving. Cynics state the savings are only relevant to the suppliers engaged in the process, are not necessarily a reflection of the real price that could have been achieved across the entire market and negotiating a lower price is not really a saving just good business practice. Regardless of the criticism, this approach is accepted practice by both buyers and suppliers as standard business and is set to remain a model to generate savings.

2) In-Contract Savings

Another method of procurement generating savings is to re-negotiate the agreed and contracted pricing with the supplier. It is usually a by-product of procurement needing to find new savings and involves an uncomfortable conversation with the supplier(s). The benefit for procurement is it generates tangible savings back to the business, procuring the same at a lower price than previously agreed. The cynics state that re-negotiating supplier pricing is a sure-fire way of destroying relationships, increases business risk to the contract budget holder, damages procurements trust and reputation internally and externally and can even lead to instability within the supply chain.

Though this approach can have a significant impact on how procurement is viewed and even challenge the validity of procurement managing contracts, in today’s tough markets when savings targets have to be achieved this approach is unfortunately a harsh reality of life.

When I talk to business leaders they rarely have a good word to say about procurement,

does that make you feel proud?

3) In-Contract Collaboration

An alternative approach to re-negotiating the contract is to undertake the contract based on collaboration. One of the greatest opportunities for procurement savings is the ability to tap into the suppliers knowledge and experience post-contract award and encourage the supplier to try and make in-contract savings, its known as a benefit sharing model. It’s not a new idea, many of you will know of a contract that includes some kind of benefit sharing clause and may even have been responsible for negotiating it.

The principle of benefit sharing is robust and proven, if the supplier can assist in applying their knowledge to save the buyer money whilst still delivering on the contractual requirements, the two parties share in the contract savings. This approach has some significant benefits to both buyer and supplier alike. For the buyer it creates in-contract tangible savings, it strengthens relationships with suppliers, it reflects a desire to collaborate, creates a sustainable supply chain and helps builds trust within their own business. For the supplier it provides an opportunity to demonstrate their added values, builds relationships and offers an opportunity to improve profits. If it sounds good, your right it is, so why isn’t it a standard approach used in all contracts today?

The challenge with benefit sharing is it’s typically put in the “too hard” box and therefore kept for strategic contracts, where the opportunity to save money justifies the extra time, effort and increased costs of negotiating it into the contract. There is merit in including it within the strategic contracts as that has the higher portion of spend, but in reality its the SME’s that are the real innovators and yet because of costs, effort and time they are locked out of collaborating.

More for more Or Same for less

When a buyer decides to include a benefit sharing clause the wording has to be agreed and clarity on potential risks need to be discussed. The inclusion of the clause is unusual within most contracts, so not only do lawyers want to review the additional words (introducing extra business costs and delays) but the suppliers interest is raised thereby causing extra focus and debate on any hidden risks, something different is occurring, why?

“Gain shares” were once seen as a possible solution, these are typically based on the supplier achieving an additional goal set by the buyer and paid more money when achieved, however this is not really in the spirit of a benefit sharing model. Benefit sharing is not about doing more for more, its about doing it the same for less, therefore for many buyers gain shares have lost their appeal as a route for achieving savings.

An Alternative Way Forward

We know negotiated savings can generate savings before the contract begins but can we tap into post-contract savings?  If re-negotiating the contracted pricing has knock on implications that can be detrimental and we have no scalable approach for benefit sharing, are there any other options we have not considered?

Actually there is an alternative, it’s called “The POD Model”. It’s a mathematical calculation that can be placed into contracts as standard and it creates a benefit sharing model by default. As it is a calculation and not language, not only do lawyers not mind its inclusion but it can be used internationally. It is designed not to increase risks to either party or alter/impact the main contract T&Cs. Their are no additional obligations placed on either party, does not guarantee any in-contract savings will be achieved nor does not remove the ability to re-negotiate the contract. However it does provide a mechanism to encourage and reward collaboration within the contract and that is our primary goal.

The POD Model is supported by both CIPS and IACCM, it is free to use and this is it:

(Total Contract Value – Total Contract Spend) * POD Reservation Fee = POD Reservation Charge

  • The POD Reservation Fee is a stated percentage(%). It apportions the savings between the two parties and defines the percentage the supplier will receive and is specific to that contract.
  • The POD Reservation Charge states the ($)portion of the in-contract savings paid to the supplier, enabling audit-able accounting.

The calculation is so ridiculously simple it has made many people question how we missed it for so long, regardless of your thoughts it’s here now. FYI, I created The POD Model and have said its free for everyone to use, regardless of country, vertical or industry. It has many business benefits but ultimately if it can assist procurement in hitting savings targets whilst unlocking procurements true value, then its probably worth consideration.

 

4) Does it Matter

If you do nothing different will the world of procurement stop turning? no of course not. No-one is demanding a change and so why should you go out of your way.

As technology automates more of the procurement processes it empowers the business leaders with the ability to procure directly, by-passing the procurement teams. Procurement supports this approach because it gets rid of the low value spend and allows procurement to focus on the “real” value contracts. Yet the attitude and relationships procurement brings to these large deals may be contrary to what the business is looking for and only creates a greater demand for further procurement automation. Ever wondered why even in these times of austerity and tight profits, procurement still gets budget to buy new tools? Is it time to wake up to what the future of procurement might look like, with business units driving their own engagements and managing their own suppliers whilst using procurement tools (not the people).

The tough question you need to ask is:

“What do my customers want from me and do I deliver on it today?”

5) What do you do next

Collaboration is not a gimmick to achieve savings targets, its a fundamental model for how procurement unlocks its true value and that of its supply chain. For too long the supplier engagement has focused on confrontation, hence the desire for sales to work with business leaders and not procurement, its time for this to end.

If you desire to unlock collaboration, what do you do next? actually its simpler than you think.

  1. If you are tendering a contract tomorrow why don’t you consider including a benefit sharing clause, you can use one you already know or The POD Model. If you want to include The POD Model then show the calculation (as above) to your contracts/lawyers and ask for any objection, you may find there are none but it depends on the type of contract you are using. The POD Model is designed for use within standard contracts (i.e not fixed price) and can even be used in Framework Agreements.
  2. If you already have contracts in place you could discuss retro-insertion of a benefit sharing model with your supplier. No additional risk to either party, just an opportunity to save for mutual benefit through collaboration

Will suppliers like this idea? it depends. You are offering the chance to help save you money by creating contract savings. This means a reduction in Supplier Revenue with increased Supplier profitability, some suppliers still want both because they are stuck in the world of Gain Shares, they are the dinosaurs of the supply chain.

Not only is benefit sharing a change for procurement but is a change for suppliers too. It provides a foundation to eliminate suppliers running contracts based on change control and blowing procurement budgets, by offering an opportunity to increasing profits through collaboration. It offers a mechanism for all levels of supplier to become instrumental in driving savings whilst improving their business value to their customers. It builds the relationships to encourage innovation not just within contracts but also new opportunities for generating mutual benefit, Finally it also enables procurement to focus on driving business Value rather than focus on price.

If you want to know more about The POD Model please see here

6) Summary

Often I have heard people talk about “falling” into procurement, not selecting it by choice. The profession is struggling to attract and retain talent, its image is far from exciting and interesting yet it is by far the most influential and important business function in any company. Where else can you hold the keys to the companies profits, growth, next generation products and services whilst being instrumental in every departments success, from sales through to operations?

By utilising collaboration to drive savings it enables procurement to become a trusted business partner both internally and externally, demonstrating a business acumen of supporting suppliers whilst achieving internal targets. You now have a scalable approach that by default encourages collaboration which can be used in any size of contract from strategic all the way down to the tail spend.

  • If you saved just 1% across all your contract spend what would that do to your savings target?
  • If we could focus on collaboration not confrontation how exciting and rewarding could working within procurement be?
  • Are you not tired of Procurement being viewed as the under-dog in business, embarrassed to say what you do and no-one understands it anyway?

Tough questions, but maybe its time for Procurement to see what it truly has the opportunity to become. You have the ability to be instrumental in driving your businesses success and you can do it whilst still achieving your savings targets. I said at the beginning of this article all you needed was a little knowledge and the desire to become more, the knowledge we have discussed, the rest is up to you.

Procurement = Knowledge with the Desire to be More!

 

Author: Mike Robertson

 

 

 

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Oct 20 2016

POD Procurement posted on Procurious

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