Now more than ever, everyone is looking for ways to save money. Companies are under a lot of pressure to reduce the cost of doing business with suppliers. Traditionally this takes the form of calling the supplier in and trying to negotiate a lower marginal cost on a product or service offering.  The main incentive for the supplier is usually the promise of securing a longer-term relationship with the company. The supplier may or may not find that promise worth the hit. How can procurement gain traction?

Analytics Reveal the Win-Win

Another approach, which benefits both company and supplier, uses analytics to go beyond the traditional techniques of consolidating spend or asking the supplier to accept lower margin and looks at the relationship between the company and the supplier.  Using some analysis tools, a company can compare its relationship with a supplier against its relationships with other suppliers, track a supplier’s performance over time, and assess the supplier’s performance against the performance agreed to in contract. This type of analysis highlights opportunities for consolidating large volumes of invoices or switching to EDI (electronic data interchange)or making other changes to lower the cost of doing business with the supplier.

For instance, analytics can reveal how many invoices the supplier issues to the company. Consider a company that rents cars from both ABC Rentals and XYZ Rentals.  ABC issues a single consolidated statement to the client each month, whereas XYZ issues 2000 individual invoices to the client each month.  If we assume that the average cost for the client to process an invoice is $50, doing business with XYZ is costing the client $100,000 per month or $1.2m for the year—just for invoice processing.  With ABC (remember, the same service is being provided), the client spends just $600 processing the 12 monthly consolidated invoices—$600 instead of $1.2M. Even accounting for some cost to reconcile the consolidated statements, the client still realizes a massive savings in dealing with ABC Rentals versus its relationship with XYZ Rentals.  By getting XYZ to change its invoicing, the company reduces its per-unit cost without asking XYZ to concede margin.

Switching to a consolidated statement can also benefit the supplier. A consolidated statement can significantly reduce administrative effort for the supplier’s accounts payable and credit control functions. The supplier has to balance the administrative savings against the change in cash flow represented by a consolidated payment. Changes to the payment terms might be required so that the relationship still works for both companies.

Getting past the impasse

Why doesn’t this sort of analysis happen now? In most companies, procurement and finance don’t often talk to each other. Discrepancies in invoice volumes are not visible to the procurement team, and they have no incentive to manage those volumes.  Reducing invoice volumes is the purview of finance, however it is the procurement team which manages the relationship and negotiates with the vendor.

Backing up procurement analytics with expertise in finance and audit, PRGX can help clients identify opportunities where supplier relationships can be improved, in many cases making it more cost-effective for both client and supplier. Of course this is more successful when the client and the supplier take a collaborative approach, not beating each other up for marginal savings but working together to conduct their relationship more efficiently. That’s a savings that will keep on giving.

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