Even companies with great strategic sourcing organizations and process are not capturing the full value of potential savings. It is estimated that companies are not able to capture up to 50% of the savings that they have negotiated. Why is that and how to fix this.

1. Capturing More Negotiated Savings
Even companies with great strategic
sourcing organizations and process are
not capturing the full value of potential
savings. Why is that and how to fix this.
Bill Kohnen CPO Roundtable July 2014

2. Executive Summary
• It is estimated that companies are not able to capture up to 50% of
the savings that they have negotiated.
• Why savings are not captured
– Buying Organizations Behavior
– Supplier Performance
– Changing Market Conditions
• Purchasing goals aligned with the bigger picture will enable better
Buyer compliance and add support resources to better manage
supplier performance and market conditions
Buying Org
Supplier
Market

3. Specific Causes of Leakage
• Buyer
– Buying organization does not connect benefit to broader goals
– Buying from the wrong supplier,
– Placing orders at prices much higher than what procurement negotiated
– People do not know who to buy from
• Supplier
– Billing at higher rates than their contract specifies
– Supplier Performance not equal for all Buyers
– Entry of new suppliers
• Market Conditions
– Actual demand different than forecast
– Technology changes
– Schedules Change

4. Goals No One Outside of Purchasing Cares About
• Purchasing wants to get rid of paper
• We want everything on a purchase order to
give procurement visibility
• We need to comply with Sarbanes Oxley
• Purchasing and accounting need more control

5. Goals People Care About
• Fully capturing our all ready negotiated purchase
contract rates will result in:
– ROI growth of “x”
– The equivalent of “y” amount of additional sales*
• We want to make your life easier by reducing
approval cycle times by 50%
• Cash flow will be improved 10%
• We want to earn $10 million in early payment
discounts
– The standard 2% 10, net 30 term yields a compounded 37% annual rate of return
* Detailed Examples Following Presentation

6. Solutions
• Align Goals and report results publically on a regular
cadence
• Make it easy for people to know what suppliers to use
• Technology can help support process
– Reasonably priced software as a service tools available
• Do not be passive waiting for results after negotiation
– Actively monitor supplier performance
– Actively monitor marketplace

7. FROM: PURCHASING AND SUPPLY MANAGEMENT ; Dobler, Donald; Lee, LaMar; Burt, David N Publisher: McGraw-Hill Companies
New York, New York 1995-12-01
Example of Purchasing Impact on ROI

8. Cost Savings Equivalence to Addition
Sales
Cost Savings
__________ = Additional Sales Needed to
Profit Margin Generate same level of profit
Assume 10M Savings with 5% profit margin
$10,000,000
_________ = $200,000,000 Additional Sales
.05