Good Procurement Practice

How good procurement practice can turn rising costs to your advantage

Research conducted by the British Chambers of Commerce (BCC) has revealed that more than half of small to medium-sized firms plan to improve the control of their prices this year due to the current exchange rate weakness of the pound. The BCC revealed that rising import costs are having a negative impact on SME’s profit margins and that some UK firm could find themselves tied into unattractive contract terms with overseas suppliers, at the mercy of Sterling’s declining international value.

However, there are steps any business can take in its own supply chain to fight rising costs. Many businesses and organisations have little insight into their spend behaviour, such as whether they are buying the same items at different price points from different suppliers, or what their total spend, and hence potential negotiating power, might be with key suppliers. There is an adage we use at Wax Digital – “you can’t control what you can’t see” and I think its apt here.

By understanding supplier spend better, businesses can identify ways to mitigate the effects of more costly overseas buying, instead of passing on the pain with unpopular price rises to their own customers. In fact, adopting spend analysis tools gives businesses an opportunity to differentiate. If other competitors in your sector can’t absorb the rises, and you can – even partially – then you’re likely to improve customer loyalty.

The BCC research also highlights how important supplier performance management is to help give more bargaining power. For example, your company might be locked into a supply contract, but if you were able to access supplier performance data and discover that the supplier had actually breached the contract by not meeting set out service levels or KPIs , then there could be room for negotiation.

Agreeing clear delivery KPIs, as well as any penalties for not meeting them, is essential for all firms, but especially growing or relatively complex organisations. For fast growth or diverse companies the emphasis to push hard to meet targets or to launch into new areas often means that suppliers are hired but then left much to their own devices from a management point of view, with little or no time made available to reflect and evaluate previous performance. There are systems available to automate this process, with collaboration tools and electronic scorecards ensuring that meetings and reviews happen.

Once contractual agreements are made it’s also important to be able to lay your hands on them easily. How often have we seen contracts stored as paper documents tucked away in disparate filing cabinets, seldom referred to and inaccessible to the rest of the business. Effective contract management systems provide a centrally stored electronic library of supplier contracts available to any stakeholder, so they can check agreed terms and whether the supplier is on the hook for any non-delivery or under-performance.

To compound the issue lack of contract visibility often means unfavourable supplier contracts become ‘evergreen’ documents that just roll on from year to year unchallenged, and with the currency weakness of Sterling since Brexit was announced, now might just be the time for extra scrutiny and renegotiation.

Any organisation anxious about rising costs of international trade should look into how good procurement practice could not only negate the financial effects but turn them into an advantage – whilst others pass on the pain to their customers.

If you would like to find out more about how any of the areas covered in this blog please just get in touch .