Everyone knows what a Sales Manager, Operations Director and a Logistics Manager does.
Not many people understand what Procurement is and what we do, as can be evidenced when I meet people at gatherings of professionals at events such as expat meetups or non-industry related conferences.
These 4 functions, along with Finance, are essentially the departments that add value to, and bring home the bacon in any organisation engaged in producing or distributing anything. Others, such as IT, HR and Legal, are typically overheads which are necessary to run any business but rarely contribute a great deal to bottom-line growth.
In today’s very uncertain economic outlook, driving value through smart procurement could mean the difference between a company surviving or thriving, rather than struggling or even folding.
When I tell someone I’m a Procurement Consultant, a rather puzzled look usually ensues, followed by a “what’s that?”
I then usually say something like “Well, it’s kind of the opposite to what a Business Development Manager does.” If I’m still getting a confused look, then the sentence “I help SMEs reduce and optimise what they spend so they can increase their bottom line margins without selling more or raising their prices” usually helps them to have some sort of idea.
And therein lies the problem at large of getting procurement to have a bigger influence on companies’ bottom line, especially once you get out of the corporate world and into smaller and medium-sized enterprises (SMEs).
Not many businesses once you get below the $50 million mark have strategic procurement as an in-house function. Every SME (US English: SMB) knows what they sell. Yet hardly any TRULY have a grip on what they BUY.
In the words of perma-tanned Welsh crooner Sir Tom Jones, it’s not unusual. Quite the norm in fact. And when you think about it, this is madness.
Let’s take the average medium-sized manufacturing business with a $20 million annual turnover and around 100 employees.
If they’re producing something, then typically around 60% of their turnover will consist of goods and services purchased from external vendors:
- Raw materials
- Operating supplies (MRO and consumables)
- Sales, marketing, administrative and regulatory expenses (SG&A)
- Logistics & distribution
Add on top of this about a quarter of their turnover that is made up of labour costs in the form of salaried employees and temporary workers.
Which then leaves circa 15%, or $3 million, left over as pre-tax profit.
The numbers will differ slightly from business to business, but these are pretty typical for your average manufacturing company.
So, this then begs the uncomfortable question of who is managing this $12 million they are spending on goods and services from external suppliers?
Just like a company wouldn’t send their EHS Engineer or HR Manager to a customer field sales visit, neither should these team members be allowed anywhere near a supplier negotiation or request for quotation.
The Warehouse Manager shouldn’t be negotiating a forklift truck lease. And the Systems Administrator definitely shouldn’t be negotiating with Microsoft or Oracle.
And yet they do. This is crazy.
Now, before I go on, let’s tackle the point that some of these companies probably have a staff member who does most of the “buying”. By that I mean placing purchase orders, chasing up deliveries, dealing with suppliers who haven’t been paid or invoices that accounts have misplaced, or fighting off price increases.
This is an administrative rather than a strategic role. It’s operational day-to-day purchasing. It adds no intrinsic value and is a transactional, reactive function which in any case will likely be done by a robot in 10 years’ time.
So, let’s go back to the $12 million of spend in this fictitious business that’s being managed by a hotchpotch of stakeholders who are not experienced procurement professionals.
Let’s run some rough calculations. About 50% of this spend ($6 million) will either be:
- Under contract, and therefore untouchable for now. Many facilities services such as catering, security and cleaning will fall under this umbrella, for example.
- Or heavily driven by the price of raw materials and thus completely dependent upon market traded commodities. The best buyer in the world won’t be able to negotiate steel, copper or electricity below the market price.
So, the balance of the remaining $6 million is what we’ll call “addressable spend” – i.e. NOT heavily market price driven and NOT untouchable due to contractual commitments.
At least 5% savings should be achievable on spend which has never been managed, negotiated and interrogated by an experienced procurement professional. This is actually a fairly conservative number in all honesty.
On a business that turns over $20 million and makes $3 million (15%) in pre-tax profit, the $300k that a skilled procurement professional could deliver to this organisation in savings would represent a 10% increase to its bottom line.
Not bad in a time when sales are flatlining at best, or quite possibly tumbling!
The bright, shiny object that is marketing won’t rescue ailing businesses during a recession when nobody out there is buying anything. Price increases will be off the table for a while too in a deflationary environment.
When times are hard, the only way a company can dig itself out of a hole is to either innovate or cut costs….but cut the right ones. Investing in some procurement help is going to be way more conducive to an organisation’s long-term survival than firing their best people or slashing training or strategic capex budgets.
So, if you’d never heard Procurement or didn’t know what we did as a profession, I hope now you do. Even more so, if you’re a board member of an SME/SMB, then I hope you can see the value that an experienced procurement professional can add to your organisation’s bottom line results.
Now more than ever is the time to go out and leverage this massive, gaping opportunity to get one step ahead of your competitors!
About the Author:
James Meads is a Europe-based independent procurement consultant, helping SMEs to increase their bottom line by driving value through strategic sourcing and spend management. He also hosts The Procuretech Podcast, showcasing how digital technology is transforming the procurement profession.
