MARKETING PROCUREMENT: How to validate cost savings
Realising cost savings will always be one of the most important goals of a Marketing Procurement team. However, it is a complex area as it is not just about decreasing overall costs, it is also about improving productivity. As such, Procurement savings can be far broader in their overall benefit than just making savings in purchasing marketing goods and services.
Clearly it is imperative that Procurement-driven savings are measured and reported against, not just to show achievement against goals but also to help the overall business improve its commercial performance and profitability.
“What gets measured, gets managed” — Peter Drucker
Here are some reasons why Marketing Procurement teams must improve their level of reporting.
Validate value delivered
The outcomes that are delivered by a Marketing Procurement team are more than just cost savings. They should also deliver productivity gains; where the level of effort and investment made is compared against the value of the outcomes delivered.
Embed continuous improvement
Measuring and reporting performance provides an opportunity to generate validated learnings which can then be used to further improve future procurement activity.
Improve overall supply chain performance
By adding value to a stage or an element in a supply chain will also open up the opportunity to improve the overall outcome of the entire end-to-end supply chain. This provides the opportunity to gain more ownership over the supply chain (Total Cost of Ownership).
Enhance market knowledge
The better informed an organisation becomes, the better equipped it is to make more insightful and valuable decisions in the future. Marketing Procurement can take a key role in addressing the complexity of marketing supply chains and by using insights to simplify and streamline these supply chains to generate added value.
“Simplicity is the ultimate sophistication” — Leonardo da Vinci
So how should Marketing Procurement savings be measured and reported against? There are three main types of Procurement savings that can be delivered:
- Investment savings
- Cost savings
- Supply chain savings
Investment savings
You can realize savings by better managing the time, resources and inputs that all go in to help define the actual requirement in the first place.
- Reduce waste — identify where waste is happening and remove it. Waste is any investment or activity that does not directly add value to the end customer. Produce to demand and ensure what is produced will be used
- Resources drain — consider the level of people effort that is made. Significant savings can be made by reducing the number of update meetings and finding other ways to keep projects on track
- Eliminate rework — improve processes, improve data, better manage handovers / briefings and eliminate subjectivity
- Consolidate demand — reduce fragmentation and start focusing on the things that really make a difference to the end customer
- Improve specification — value engineer the product or service so that it is more efficient to produce / deliver
“One standard is worth a thousand committee meetings” — Dale Dauten
Cost savings
You can reduce the purchasing cost by better managing the supply side.
- Understand cost (benchmarking) — you should not rely on the supplier informing you what the market price should be. Develop your own benchmark by building an understanding of actual cost based on substrate prices, hourly rates, overheads, and mark-ups
- Achieve cost transparency — gain control of the supply chain and identify the costs of every stage of the supply chain. Transparency paves the wave for real cost savings through waste reduction rather than just focusing on margin reduction
- Like-for-like tendering — gain control over specifications. Ensure every supplier is quoting the exact same item or service. Compare oranges with oranges
As cost savings are generally the most important area to report against, I would recommend the following approaches to validate savings achieved:
- MARKET BENCHMARKING: Compare the cost proposal provided by the supplier with an internal cost estimate (or benchmark price) that has been generated based on a sound understanding of the underlying costs in the market
- COST SAVINGS: Compare the cost proposal provided by the supplier with the previous cost of the item (repeat orders of an item with the same specification)
- COST AVOIDANCE: Compare the final cost of the product with the average of all the quotations received that are within a defined price range
Supply chain savings
In addition to reducing the investment made in defining the requirement and reducing the level of direct purchasing costs, further savings can be made in better managing the overall end-to-end supply chain:
- Designing for life-cycle duration (time) — understand the required longevity and duration of the requirement and design specifically for it. Do not over-specify or over-engineer for a short-term need
- Optimising for life-cycle demand (quantity) — understand the future need for the requirement in order to identify the best way to deliver the entire demand. This will guide what tooling and production methodology to use
- Modelling the supply chain — removing unnecessary steps in the chain. Introducing technology to support P2P, e-procurement. Blending to provide flexibility in supply but within a fully integrated end-to-end supply chain. These will all generate further savings
Management is about handling complexity. Leadership is about creating simplicity. — Peter Docker
This is both a challenging as well as a highly complex area. For Marketing Procurement to win and to be able to validate the value they create they need to break down the walls and gain more control and transparency over the supply chain. In this way, they will be able to build insights and understanding that can be applied to create a more open, valuable and simplified approach to generating procurement savings.
If you would like more information on how LeanPie can transform your shopper experience supply chain, please feel free to contact David at david.newberry@leanpie.com
