A constant and recurring task of procurement is the optimization of purchase prices, processes and cost-influencing conditions. From the CFO’s point of view, costs generally need to be kept in check or reduced. This presents procurement with the task of finding and applying the right levers. Starting points can always be found in cooperation with individual suppliers. Sustainable and successful levers for cost optimization can only be identified through an applied commodity group management. By logically grouping articles, materials or services into commodity groups (or even material groups), expenses can be transparently evaluated. The following five analyses can only be carried out based on a logically structured and implemented material group management.

1. too many, too few suppliers

By bundling on suppliers, the general costs in the cooperation with suppliers related to deliveries and management can be reduced. Logistics costs per delivery are significantly lower with fully loaded trucks, the cost of handling a single order is better spread over the higher number of items ordered, and the cost of distribution can be spread over a higher turnover. In addition, managing each supplier and processing each invoice in-house also adds costs. So, there are many reasons to keep the number of suppliers as low as possible.

Contrast this with risk management and the danger of single sourcing. For this reason, the logical setup and the right structure for a commodity group management is important. The procurement department can only recognize a single sourcing if I have chosen the right level of detail for the material group management for the respective company. Single sourcing does not have to be negative from the point of view of bundling; a risk only arises in the case of dependency. As a rule of thumb, can I switch to another supply source within the given warehouse range? This will apply to many of the items and services needed, where it does not apply, active risk management must be undertaken. And in doing so, the question of how the potential cost of a failure relates to establishing a second source of supply must be addressed.

A review of the number of suppliers in material group management at least once a year is therefore mandatory.

2. shift in purchasing volume

The total expenditure by procurement must always be seen in correlation with the achieved turnover. Every company has a material usage ratio, the cost of purchased parts and services that are necessary to produce services. And this ratio must always be considered and is an important building block for the margin of a company.

However, companies frequently experience shifts in purchasing volumes between individual material groups. Therefore, a product group management system should primarily keep an eye on the development of purchasing volumes and prices in the individual product groups. Increased demand due to new products or sales markets may well lead to shifts in purchasing volumes in the product groups. However, increased purchasing volumes also mean new leverage for negotiations with suppliers. The same effect as with bundling.

Meaning: Increased purchasing volumes compared to the previous period must always be evaluated regarding possible cost reduction levers in material group management.

3. processes up to date

A procurement department not only generates costs for the company through external purchasing volumes and is responsible for a good material usage rate, but costs are also generated by the procurement department itself and by the purchasing processes within the company.

Good material group management can be used, for example, to identify material groups and the associated purchasing volume, which can be mapped in a catalog management system using a no-touch process. Once identified, a catalog quota can thus be controlled and transparently tracked.

The same applies to the electronic tender quota; regular tenders do not make sense for every material group. Here, too, it is helpful to define a target quota as part of merchandise category management. Good material group management also allows potential process optimizations to be identified and evaluated based on key figures (volume, business transactions).

In addition, processes in cooperation with suppliers can often be optimized. A comparison with other material groups and the exchange of information about solutions that can be adapted helps here.

Every procurement department must be able to record the key figures for process optimization on an annual basis. To do this, of course, the processes must be known and assessable.

4. Driving innovation with suppliers

Not only processes can be optimized together with suppliers. For every supply chain, avoiding costs means an advantage for all parties involved. Innovations help to avoid existing costs. If existing costs can be reduced with process optimization, innovations can avoid costs by leaps and bounds.

By digitizing the procurement process on both sides, administrative costs are optimized, between 1% and 5% depending on the type of requirement. This effect should be achieved in any case. However, an innovation at the product or e.g. at the packaging leads in most cases to a much more significant cost avoidance. The right packaging can avoid up to 30% logistics costs, the replacement of a material raw material significantly more.

Innovation management should therefore be an important component of material group management. Especially the exchange between material group managers increases the overall innovation management enormously.

5. cost management based on transparency

The important result of a commodity group management is however the transparency over the entire expenditures. A purchasing volume of e.g. 30 million € with over 1,800 suppliers is difficult to manage in its entirety without structure. In most cases, the procurement department only deals with the TOP 20 suppliers and various individual projects. A material group management divides this mass into manageable individual topics, into material groups. And for each individual topic, procurement can determine, usually at the end of the year, which levers are to be applied. Has this material group been analyzed, tendered or negotiated in the last three years? Is the material group suitable for a digital ordering process? Can innovations from other commodity groups also be applied to this commodity group.

Therefore, it is a must for every procurement to know its topics and to control them via key figures.

There are many options and levers, they just have to be applied correctly.

 

Oliver Kreienbrink

Managing Director, ADCONIA GmbH