Focus on Costs: Day 3 – Tactical Quick Wins

Yesterday we introduced a simple tool for your organisation to address third-party costs and build resilience into your supply chains.  

This tool, the Kraljic Matrix, is deceptively simple yet provides a significant amount of insight into approach required for different spend categories and the associated speed, impact and effort required to achieve third-party cost reduction and supply chain improvement goals. Our second tool is KISS, which we’re aiming for throughout this Programme!

Today the focus is upon delivering Tactical Quick Wins.  Tactical Quick Wins will surface in both the lower “Tactical” boxes of the Matrix (Figure 1.), there tend to be more in the Tactical Acquisition box, but not exclusively so.  

Tactical Acquisition

The Tactical Acquisition box attracts spend categories which exhibit low size of spend and low supply risk characteristics.  In short this means that these spend categories are not integral to the ability of an organisation to conduct its business in the event that supply is interrupted. Also, given that spend is modest and the supply market is competitive, these spend categories should not take up a lot of your people’s attention. Having said this, our experience is that many business’s either don’t pay enough attention to these costs (e.g. allowing prices to drift up over time) and/or spending too much time on the purchasing process.  

There are many categories of spend in this box which are defined by high volume of small orders and often high variety of choice at a brand and specification level.  The savings in these spend categories can come in the form of lower prices (often greater discounts relative to a standard rate) but especially in the elimination of effort required to purchase (call-off) such items. Often the ‘value added’ by the purchasing interventions is disproportionate to the value of the goods / services being purchased.  

Examples of spend categories in the Tactical Acquisition box vary from sector to sector largely dependent upon the associated level of service demanded, however, for the purpose of generalisation, typically these are or are similar too:

• Stationery
• Fuel Cards
• IT Peripherals incl. Memory
• MRO (Maintenance, Repair and Operating supplies)
• Utilities
• Telecoms

These types of spend category are typically sourced from competitive marketplaces where brand and specification, subject to being fit-for-purpose, have little influence on buying decisions.  Price is king subject to service being to a minimum acceptable standard.  However, be aware that the cost of switching should always be a factor when classifying spend categories in the Tactical Acquisition box.

The overall approach should be to drive price down aggressively, put in place efficient processes so that your people don’t spend excessive time on the category and introduce controls to avoid suppliers pushing-up prices or relaxing service levels. The sourcing strategy to realise best price, a minimum acceptable standard of service and an efficient call-off process is a credible bidding exercise.  Bidding might be a manual paper exercise or take the form of an e-auction.  

The choice must be carefully considered. Include the need for suppliers to deliver process cost savings in the bid .  These may be significant in relation to the actual category spend  if action is taken to automate or outsource internal processes.  

Quick Wins themselves will take many forms all of which should be quick to impact the bottom line and consume little effort to realise.  A range of target quick wins, subject to the nature of the sector, are:

• Aggressive price negotiation
• Threat of Competition
• Greater Discounts 
• Minimum Order Quantities 
• Volume price breaks
• Longer Payment Terms (and in today’s climate) Payment Holidays
• More Value Add including Service Considerations
• Run Down stock holding
• Substitute generic for branded items 

The supplier is aware they are providing a commodity and you should be aware that their tactics will be to try and differentiate themselves and muddy the waters. On day 6 we’ll address this in Power Regimes & Supplier Perception.

Tomorrow we will explore the opportunities associated with the longer term tactical spend categories which have been classified to the Tactical Profit box.