Central Procurement Organizations: The Good? The Bad? The Nothing?

Do you know what it feels like trying to find the Truth? Right. Basically, the Truth does not exist. A lot of small truths – yes. And that is the most important: to find Your Truth.

Let’s get back to central procurement organisations. There are a lot of them. Most of them work in FM, MRO, indirects areas. Keywords, which lead to them, are “outsourced service”, “consolidation”, “increased buying leverage”, “reduced administration costs”, some others.

I am a procurement specialist, so I should like it. And in general, I would. You can expect to get the following benefits:

  • Lower prices;
  • Consolidated invoices;
  • Higher level of service;
  • Spend manageability and transparency;
  • Better planning;
  • Clear cost of a function.

However, you should not expect this as granted. A recent example showed, that there are plenty of different scenarios:

  • Dodgy fee structures (yes, more than one different way to charge for the services);
  • High prices due to additional rebates CPO companies are taking from original supplier/manufacturer;
  • Continually decreasing service levels;
  • Duplication of PO entering into the systems – with no purchases consolidation whatsoever (yes, simply re-raising the POs they get from you to the supplier);
  • Unjustified management fees;
  • Broken communications: reporting the good (on time) and ommiting the bad (delays; which, actually, are more important).
  • Inefficiencies: over-staffing and similar.

The situation cannot be black and white. Some might suggest, that only small to small-medium sized companies benefit more from using CPO services, while medium-large companies don’t, as a rule.

All in all – there is no single Truth. My learning was to ask questions:

  • So, the turnover increased. But has PO quantity gone up? Has SKU count increased?
  • How long does it take to raise PO and how many do you raise? How many people does it take to service that? Is there a possibility to automate it?
  • What are the business needs: processes, people, items? Do you have “special” items and “store” items? Which is the biggest part of spend? How many delivery points do you have? Working hours? “Emergencies”?
  • What is the added value that CPO would bring you? Could you achieve it by yourself? I mean, IF you would REALLY try?

And all this reauires – is to stop and think. Challenge the situation. Move a bit out of comfort zone.

Thanks for reading! As always – any questions or feesbacks very welcome!

Central Procurement Organizations: The Good? The Bad? The Nothing?

Indirect low value spend categories: real life example with tips (office supplies)

Another subject, that I have recently dealt with, was office supplies. One of those categories, which is usually left unnoticed, when things go great; but the moment the tiniest thing changes or is missing (for instance, stapler. Can you imagine, how bad it is to come to an office supplies cupboard, and to find black (!!!) stapler instead of blue! Outrageous!!! I am joking, of course. Or am I?), all the hell brakes lose.

Imagine you have 20 locations across Europe. Do you think that makes you a very attractive customer for stationery supplier? Think more. Let’s say, overall annual spend is €200k (for all of those twenty or twenty-many locations). Do you think it makes it worth a while investing quite expensive purchasing manager’s time to negotiate tiniest price of tiniest item? Think even more. Did you think, that finding biggest spend item and negotiating only the price of that one item will bring your spend down while not investing too much time and resource into managing the category itself? Warmer, but not yet to the point. Think again.

Huge part of indirect, very small and scattered category TCO costs is administration costs. Every PO you raise (and that is also goods reeiving, invoice processing), without going into too many details, can cost your company anywhere from €150 to €250. If the order value is up to 250 Eur – your administration costs are 100% of the value of goods. How much did you say you negotiated off the price? Let’s say, you order stationery once a week. That is, let’s assume, deducting all holidays and human factors, 40 times a year. Say, with average costs of 200 Eur per PO, you will end up facing 8000 Eur of administrative costs per year. And that is – per each location! 160 000 Eur!!! If you still remember, the cost of goods being €200k.

To keep this all post Friday-short and considering the value of it to the company, here is the short list of things to keep in mind, dealing with stationery:

  • Consider alternative options at all: company stops buying stationery at all, sets “stationery supplement” and pays it out to staff for them to manage it according to their own judgement. This is also a very “green” and “lean” alternative. Many times people print even if they do not desperately need only because they can. People tend not to care much about the property that is “not theirs”. You can change it.
  • Item list. Not longer than 100 items. Or shorter, if possible.
  • Demand management – approved standardised items, budgets.
  • Cost optimization: inventory management; minimum order values.
  • Automation: web-shops, punch-out catalogues, invoice flips, direct invoice injection.

Not everything is as straightforward in procurement as you could think. Please, do drop me a line for more specific thoughts, benchmarking clues – will be more than happy to share my insights – with no charges involved.

Indirect low value spend categories: real life example with tips (office supplies)