5 Keys for Business improvement through Procurement

5 Keys for Business improvement through Procurement

An effective way to reveal business improvement opportunities is to look deeper into our Suppliers spend. Suppliers’ spend includes material & services to be used not only directly for our business end products production but also for our business functionality. Spend analysis can drive us into useful conclusions & help us target points to improve our business competitiveness.

Below mentioned five basic check points to apply on our spend analysis, in order to point out business improvement opportunities.

  1. 80% – 20% Rule

At least 80% of our suppliers’ spent should come from 20% of our suppliers list or less. If this rule in our business is significantly different, e.g 80% of suppliers’ spend comes from 50% of our suppliers, then we have a significant spend spreading, which has an high probability to miss savings and Suppliers’ better services.

  1. Maximum one or two Suppliers per category

Taking into account the importance of a supply for my business and the probability of failure of the supplier (delay, supply failure etc.) it is highly recommended to collaborate with no more than 1-2 suppliers per category. If we collaborate with more than two, without specific reason, probably we are missing saving opportunities and better service from the suppliers.

  1. Suppliers’ Credit ≥ Customers’ Credit (Weighted Average)

This rule ensures our business liquidity. If credit we provide to our customers is longer than the credit we agree with our suppliers, then there is a high potential to face liquidity issues.

  1. Minimum 80% of our spent under Contracts & Agreements

It is important that we have Contracts in place for at least 80% of our Purchase orders. This not only reduces significantly the purchase process (we don’t need to renegotiate every time the purchase terms & conditions) but also ensures good prices and volume rebates.

  1. Contract Bench-marking at least every two years

Agreements that haven’t been renegotiated or bench-marked for more than two years, without particular reason, have a high probability to include significant opportunities for cost and process optimization.

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