If the US government could collect a dollar for every article, report, or presentation with a “Doing More with Less” theme created in recent times, its deficit issues might be behind it. For many, this is one of the new themes in the ‘New Normal’ economy; but for CPOs and other procurement leaders, this has been a longstanding practice, even when times are good. Doing the most with what you have and getting the best return on your current assets is certainly important in tough times, but it is also just smart business. ROA or return on assets ‘gives an idea as to how efficient management is at using its assets to generate earnings’ (Investopedia). The returns generated from the list of ten ‘assets’ below have a revenue-like feel to them; they are incremental, require relatively small investment, and can impact the bottom line directly.
Ten areas to improve returns:
- Capital Assets – One of the best ways to save money is not to spend it. One of the best ways to get money is to sell something. In a large, globally-dispersed operation, it can be very difficult to get an accurate enterprise-level view of the location and condition of all owned capital machinery and equipment. If there are assets on-hand that could be redeployed to avoid additional purchases or assets of value that are collecting dust and tying up working capital, unlocking this value would provide a huge boost to budgets and the bottom line. Depending on the situation, it may make sense to engage a third-party that specializes in this. Many offer lower initial investments with gain-share programs. One of your best opportunities to improve returns this year may literally be in your own backyard.
- Inventory – The fact that the holding costs of inventory are often difficult to calculate does not make them any less real. Cash is still king in 2010. While innovation in areas such as multi-tier inventory replenishment and capacity collaboration should be actively pursued (although this generally falls to the supply chain team which, while we’re on the topic, should assign inventory ownership to a single resource or team), opportunities also exist for sourcing teams to do a better job understanding these costs, including them in their RFx’, and evaluating the total cost of each bid. Items that directly impact inventory holding costs (when title is taken, transport times, storage costs, insurance, interest, etc.) and items that indirectly impact these costs (lead times, any need for increased inventory for risk mitigation, certain SLAs, etc.) should be included in the evaluation. In certain industries, some suppliers may be willing to invoice when an item is used versus ordered. It does not hurt to ask.
- Human Capital Assets – Procurement’s greatest potential upside is also its largest constraint. Of the dozens of CPOs I have worked with recently, finding and retaining talented staff is a top challenge for almost all of them. While the hiring market is still a buyer’s market, getting an open “job req.” can be a challenge. The primary options to improve your team are (1) “trade up” in the marketplace (2) improve the team you have or (3) some blend of the first two. CPOs can “trade up” via turnover or by reallocating staff expense by outsourcing or near-shoring more tactical areas and investing the savings in hiring more strategic resources. Training is obviously the primary lever for growing team skills and budgets permitting should be pursued sooner rather than later (slack demand in the current market presents opportunities for discounts or greater value).
- Technology (Strategic Sourcing) Assets – The percentage of addressable spend that is sourced by the average enterprise in a given year is not what it should be. The number of active and capable eSourcing users in the average enterprise is not what it should be. I believe that enterprises must break from the past and begin to enact an eSourcing 2.0 policy where every negotiation that results in an executed contract should use an eSourcing solution. See Friday’s article for more details.
- Technology (P2P) Assets – With eProcurement applications in place at some enterprises for more than five and sometimes even ten years, I wonder how many of these older programs still have active user adoption and supplier enablement initiatives and bonus their team on improving these metrics. If you are an older program that has become staid or a newer program that has lost momentum, it is time to reenergize, re-introduce, and possibly even rebrand the program. Don’t sell “compliance,” sell “employee and shareholder value;” better yet, have your CFO sell it for you.
- Technology (“Shelfware”) Assets – Remember that module that was thrown into that big software deal a few years ago for free? Yep, the one that you never demo’d, didn’t understand or want, but took in the heat of negotiation? Free feels so good, doesn’t it? Well, the module was probably never deployed and now sits on a shelf somewhere. Milton Friedman was correct and you may be paying maintenance on that “free,” unused throw-in. Review your spend and triangulate on maintenance that does not need to be paid. Stop payment. Ask for refunds. Be aggressive. (Sidebar: this maintenance spend audit would be much easier if you had followed the eSourcing 2.0 doctrine and had the entire negotiation captured in your eSourcing system).
- Supplier Relationships as Assets – How often is procurement involved in a product roadmap or product planning discussion? The answer for the average enterprise is “not very often.” This is a lost opportunity because procurement as an afterthought in product lifecycle management usually means that suppliers are also an afterthought. Innovation happens elsewhere and procurement departments can leverage their supplier relationships to help product teams find it within the current supply base and beyond it.
- Working Capital – (1) In recent conversations with a handful of CPOs, I have heard about the multi-million dollar impact that a payment terms extension program can have on the bottom line. These terms should really be extended or defined in the executed contract, not after the fact and I’m not a fan of renegotiating current contracts, but the results speak for themselves. Be careful not to exploit suppliers living on the edge. (2) Early payment discounts offer risk-free returns that are unmatched anywhere in the market. A/P and procurement should engage with treasury to develop a proactive payment plan that gets the highest yield.
- Overpayments are Assets – Even the best-run operations have P2P and contract issues that result in overpayment and other errors. These errors can have a material impact. Post-audit payment recovery services that work on a gain-share basis and require no up-front investment are available in the marketplace. Most can provide industry references and some estimate of potential value. What is found falls directly to the bottom line.
- Supplier Contracts are Assets – Payments that are non-compliant to contracts have a real cost (see previous bullet). Maverick spend has a real cost too. Start by introducing a “No-PO, No-Pay” policy and then work to ensure that the POs are with preferred suppliers. But don’t just enact the policy by sending a random email next Monday morning (I literally just received an email like this). Communicate across several platforms. Add some context: the ‘whys’ and ‘hows’ and an FAQ on process and who to contact with questions. Track results. (Rinse.) Repeat.
I hope to return to many of these assets in future, more detailed articles.
If you have a preference on where I should start, please let me know.
