Focus on Costs: Day 4 – Tactical Longer-Term Wins

Yesterday we looked at realising some quick win savings from third party costs (the spend) using a spend segmentation framework called the Kraljic Matrix (see Fig.1 below), a four-box matrix defined by Supply Risk and Size of Spend.

Quick Wins savings are those that make an immediate impact upon trading costs and are delivered without a significant corporate effort.  We explained why the source of Quick Wins is generally in the boxes classified as tactical, Tactical Acquisition and Tactical Profit.  Most Quick Win savings can be found in the Tactical Acquisition box where the nature of the savings are a combination of price reduction and process savings.

Today the focus is upon realising Tactical Longer-Term Wins.  These tend to surface in the Tactical Profit box, but not exclusively so.

The Tactical Profit box attracts spend categories which exhibit higher spend and lower supply risk characteristics.  In short this means that these spend categories are not integral to the ability of your organisation to conduct its business, if supply is interrupted, at least in the short term, but they do weigh heavily on the finances of an organisation.   This box frequently benefits from attention due to the level of spend involved which, as noted previously, can be substantial. 

The reason that the spend categories classified to the Tactical Profit box are Longer-Term Wins is that these categories typically must fit-in with other processes and end-users in your business.  These other processes and the people involved will need to agree and adapt to any new supply arrangements.

This is different from Tactical Acquisition spend categories where, by definition, switching costs are low (for example Utilities, where, people won’t necessarily even be aware of changes in supply arrangements.)  For Tactical Profit spend categories the input from other functions, processes and people may be of a practical nature for example the IT Hardware spend category (think laptops) or Logistics, where service and supplier interface need to be assessed with trials. Or the input may be of an emotional nature where preference affects decisions and education must play a role in influencing end-users.  

Marketing and other Professional Services are examples of Tactical Profit spend categories with Win potential as a result of historic resistance to change, for emotional reasons. Company cars are a classic example of a category with intangible, emotional resistance to change.

Tactical Profit spend categories are typically sourced from competitive markets – which reduces supply risk – however, branding has a greater role to play in decisions compared with Tactical Acquisition spend categories.  

Successful cost reduction initiatives in this Profit box demand that functionality is made king and that the influence of brand / emotion in the buying decision is eliminated.  If an element of the category cannot be reduced to commodity functionality then it should be carved out of the spend category and treated differently.  

For example, it maybe that the input of a specific Marketing Agency or individual consultant is considered critical to the future success of your business.  In which case this specific spend should be carved out from the broader category, allocated to one of the Strategic Boxes in the matrix (based on it’ higher supply risk) and approached accordingly. The sourcing strategy for this Agency or individual therefore reflects their personal scarcity and contribution BUT the remainder of the spend category in Tactical Profit should be commoditised.

The spend categories classified as Tactical Profit often represent fewer but larger individual orders than Tactical Acquisition making these spend categories less susceptible to dramatic process savings by comparison to the value of the spend.  

The sourcing strategy to realise best price and minimum acceptable standard of service is a credible bidding process, just like that utilised in the Tactical Acquisition box discussed yesterday. A bidding process might be manual paper exercise or take the form of an e-auction.  The choice must be carefully considered.  

The key difference with supply competitions in the Tactical Profit box, is that the nature of the service and end-user interface is an issue. The effort to resolve the issue typically requires significant input and buy-in from other functions, who will be invested in the status quo.  Change for these stakeholders becomes contentious and needs to be carefully managed.  Interestingly the use of supply competitions for spend categories in this box often results in the same trading arrangements but at a lower cost.  

It should be noted however, that in situations where positive emotional attachment to the existing arrangements exists, prices will naturally inflate. This is because it is generally more difficult for your people to challenge the supplier on matters such as: upward price adjustments over time (often due to relationships or favours given by the supplier); demanding that process savings by the supplier are handed over to your business; reducing fees where the supplier has deployed less costly resources onto a job rather than the senior resources expected.  Identify spend categories where there has been emotional buying and you will find dramatic Tactical Longer-Term Wins. 

Tomorrow we will turn our attention to the realisation of savings in the top two boxes, Strategic Security and Strategic Critical.