Optimization Beats Leverage

Spend Management
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We’re often asked by clients what real benefits are derived from outsourcing the management of tail spend. Is it process costs, labor arbitrage, price savings etc.?

Whilst all of the above contribute significantly, meaning in the range of 2-15% of the total procured cost, by far and away the greatest value comes from what we call optimization, sometimes referred to as specification improvement or specification alignment. Optimization of product specs frequently generates savings from 20-50%.

What do we mean by optimization? Well, it simply refers to the fact that more often than not, when creating requisitions for purchasing, users frequently over-specify items or ‘source-direct’ them, i.e. specify items in a way that restricts the choice of vendors. The reality is that if we are left to purchase our own products, we’ll choose the shinier, newer, smarter device. Of course, being good corporate citizens, we’ll be tough on the vendor to give us the best price on any item, but we’re not going to be as tough on ourselves to buy an inferior item that is just as fit for purpose.

Part of the problem is, of course, that users lack the subject matter expertise to understand where they can make the right trade-offs. There is a balance; and one should also understand the total lifecycle cost of products, not just the purchase price, but notwithstanding this point, the savings are tremendous. Here are a few examples from some recent client purchases:

  • Industrial washing machine with 10kg payload, price leverage saving 5%, specification reduction from 10kg to 9kg, 25% saving.
  • Bulk purchase of balloons, low-cost country sourcing generated 10% discount, while size reduction and single color logo printing reduced cost by 42%.
  • Office tables – requirement for over 20 height-adjustable tables, but in reality only 2 adjustable tables were required and rest could be standard – savings of 18%.
  • Purchase of mailboxes – upgrading the specification of mailboxes to lockable cluster box spec eliminated mail theft, which has higher cost to business than the mailboxes.

These examples demonstrate clearly that optimization benefits can be 3-5 times greater than other commercial benefits from a tail spend management program. The scale of these benefits easily justify the cost of bringing in a managed service provider with specialist buying experts who are able to challenge demand in the appropriate way.