Sustainable procurement functions in the face of recession

Look to the bottom two-thirds of your purchase ledger
Under-pressure procurement functions often stick to just the top one-third of the purchase ledger to generate cost savings, leaving the ­bottom two-thirds untapped. The result: significant potential for cost reduction, with no clear route to achieving it.

So how can FDs and the finance function get involved? How can they work with purchasing to identify savings? What kinds of savings are possible and how can they best be achieved?

Talk to FDs – and procurement functions – and some clear messages quickly emerge.

To begin with, purchasing functions must first accept there’s a case to answer. Many buyers focus their attention on negotiating new ­contracts with suppliers, supplemented by ­periodic ‘category reviews’ of major spend items. And if the potential savings tied up in the lower reaches of the purchase ledger are to be tapped, that needs to change.

“All too frequently, purchasers either think the bottom two-thirds are inconsequential, or that they’re already achieving best-value ­pricing,” says Graeme McKinnon, commercial director at Expense Reduction Analysts. “They couldn’t be more wrong.”

One example is at Moorfields Eye Hospital in London, where contracts officer Aitor Cisneros wanted to be sure that the hospital was getting the best possible deal on the water coolers they bought in – an essential spend.

With 43 coolers in and around the hospital and its outreach clinics, each typically costing £6 to refill with a 19-litre bottle of water, the annual cost of around £1,000 per cooler quickly mounted. There were operational costs, too. “We were tied to having lorry deliveries of water cooler bottles every two weeks,” says Cisneros. “We had to find space to store the bottles and the empties were an eyesore.”

The solution: mains-fed water coolers, each equipped with carbon block filters and ­ultraviolet lamps to filter out and kill any mains-borne contaminants.

A cool saving
The impact on cost? Instead of paying £6 or so for 19 litres of water, the hospital pays about two pence. A ‘sleep mode’ incorporated in each cooler also reduces the hospital’s ­energy consumption.

“We only have one bottle-fed cooler left in the hospital,” says Cisneros. “Where you’ve got about 30 regular users of one cooler, it ­definitely amounts to a huge cost difference if you switch to mains-fed coolers.”

The figures speak for themselves. A thorough procurement review can yield an average saving of between 5% and 10% of its cash spend, research suggests – equivalent to a 20% boost in profit for the average FTSE-350 business. And it’s in the bottom two-thirds of the purchase ledger where the potential is greatest. There are more suppliers and more ‘maverick buying’, but because it’s been so neglected, there’s so much more potential.

“Once you start diving into the detail, there are invariably savings to be made,” agrees Julian Seidman, client finance director at FD Solutions, a provider of part-time FD. “On their own, they might not be significant, but are often easily made and quickly add up to a big number.”

Precisely how those savings will be made is down to individual situations and once focused on the task, buyers will be quick to spot opportunities.

In some cases, reopening price negotiations will be the answer. In others, it will be a policy decision: does everyone with a business-­provided mobile phone or Blackberry actually need that provision, for instance?