Commercial thinking Procurement – is your function creating enough P&L value?

Whether you are in Procurement, Executive team, Finance, Commercial, or a business function, you will appreciate that the need to reduce costs and align to challenging budgets is constant and getting more important by the day!

As a practioner professional who has been in Procurement and Supply Chain for 25 years, I have witnessed Procurement evolve from an administrative and support function to, in many positive cases, a true strategic and value creation partner for the business. This has resulted in Procurement leaders gaining the opportunity to get involved and lead areas from sustainable procurement through to AI development. This is great for the Procurement profession and long may it continue. 

Here at 7 Steps Solutions, we have noticed a trend with this increased strategic remit – Procurement functions that through capbility gaps, resource constraints or managing multiple focus areas, are not always 100% commercially focused and aligned with Finance and the business across all the potential topics that will signifcantly create impact by reducing costs and growing revenue. 

Where and how do you typcially reduce costs:

Fixed Costs

• Overheads
• Rent
• Equipment

Variable Costs

• Service costs
• Logistics costs
• Product costs

What are just some of the classic levers pulled to achieve cost reduction outcomes:

• Review contracts for opportunities
• Eliminate maverick spending by greater spend and process controls
• Centralise departments and procurement processes
• Consolidation and rationalisation of suppliers and services
• Insourcing and Outsourcing
• Introduce automation and technology efficiencies
• Optimise inventory management (just in time and reduce obsolete or slow-moving stock)
• Optimise or restructure supply chain and network distribution channels
• Specification and product standardisations
• Price benchmarking 
• Demand reduction
• Zero based budgeting
• Increased supplier competition
• Working capital
• Direct supplier negotiations
• Volume aggregation
• Supplier performance and relationship management
• Expenses
• Hardware and software related costs
• Indirect supplier costs (i.e. Professional Services, Marketing, Utilities, IT, FM & Property, Logisitcs, Fleet, HR, Learning, Travel)
• Direct supplier costs including MRO and Materials

These are all good levers and can typically support reduction in costs from 5-20% depending on the maturity of the business and speed to deliver. 

Be careful though - some of these levers used badly can actually increase costs i.e. low cost supplier can create quality issues, increased payment terms can result in higher costs elsewhere or a focus on price can affect the Total Cost of Ownership value with increased operational or maintaince costs. 

However, the bullet list of saving levers are also all typcial go-to Procurement levers, supplier related or Procurement process related, with many often falling into medium to long term value creation and benefits. 

What a business, especially Finance, additionally value from Procurement is support to identify and deliver savings in areas not often owned and deeply reviewed, such as (non-exhaustive):

• Review insurance costs (typcially an untapped benefit)
• Review banking fees (just a 1% reduction can have a significant 6 figure impact)
• Implement hiring freezes
• Account Payable audits to identify reclaims on duplicates, overpayments, VAT
• Business Rates and Rent audits (be careful on this one as this actioned badly can have the oppositie effect!)
• Contractor and strategic supplier service break periods (i.e. breaks during quiet summer and christmas periods)
• Property strategy (sale or lease existing portfolio)
• Pension fees
• FTC term process - for exiting or converting full time contractors to permanent 
• Benefits – right fitting to the market, including remove out of cycle payrises
• Supplier bartering – quid pro quo with strategic suppliers (i.e. if we spend x per annum with you, what do you spend with us that supports our revenue)
• Tax optimisation - tax credits, capital allowances, jurisdictions and other reliefs
• Debt restructuring - consolidate high-interest loans or refinance existing debt at lower rates
• Business specific costs i.e. broadcasting may have opportunity to review/reduce content production and distribution costs, manufacturing may be able to benefit from grants and tax credits, retail may benefit from annual investment alloances, waste schemes or reverse logistics and so on…

Basically, areas and topics that can demonstrate a greater commercial skillset and business acumen, and can directly, positively and rapidly impact the P&L within the financial year. 

Here at 7 Step Solutions are motto is “Commercial Thinking. Procurement Impact.”

We believe the future is developing procurement functions that can think like Finance and act quickly like Private Equity, in parallel to typcial (and growing) Procurement skillsets, to really drive impactful profitable change and outcomes. 
If you are interested to know more about the key triggers for why your business may need greater commercial and profit generating thinking to improve your Procurement and Supply Chain outcomes, read more here and consider taking the 7 Step Solutions rapid Commercial Procurement Assessment to understand where your organisation sits on the 10 step Commercial Procurement Maturity Ladder