Following another board meeting where ‘how do we reduce costs?’ was discussed for the umpteenth time, the CEO, CFO & CPO of a large corporation stop for a few moments to discuss the specific subject brought up at the end of the meeting – how to better control what is being spent on purchased goods and services across the organisation.
“Even though we have written policies for pre-authorisation of purchases, we all know people skirt those left and right,” says the CEO. Turning to the CFO and CPO, he asks: “What do you think that’s actually costing us?”
The CFO answers immediately: “It’s hard to know the exact amount, but we can easily do a quick estimate.” Thinking out loud…
- $100m is our rough annual non-payroll spend
- $75m (75% of $100m) of that is ‘discretionary’, meaning above and beyond things like utilities and so forth
- $7.5m (10% of $75m) of that amount could surely be avoided if managers always had the opportunity to approve or not based on how necessary the purchase really is, whether or not that item is already available somewhere in the company, their current standing against budget, etc.
“That’s $7.5 million a year that could be saved,” she states with a frown on her face.
“But that’s just part of the story,” picks up the CPO. “Much of that money is spent with suppliers with whom we do not have price agreements. So the discounts we’ve negotiated are completely wasted. I can take a swag at what that amounts to…”
- $75m in addressable spend (“just using Mary’s number, but I’m sure it’s close”)
- $15m (a good 20%) of that is unnecessarily spent ‘off-contract’, meaning spent with sources other than ones where we have supplier agreements in place for the type of item purchased
- $9m more (12%) is my conservative estimate of how much addressable spend we could negotiate spot agreements on if certain types of requests were routed to us to get competitive bids
“Making a quick mental calculation, that’s $24m which is unnecessarily spent ‘off-contract’ and addressable spend we could negotiate spot agreements on. 17% of that equates to over $3.5 million in savings.”
