Keith L. • One of the reasons is that all of the business units do not fully utilize purchasing from the contracted supplier/vendor. Another scenario is that the business units use the contracted pricing to purchase off-program and the savings are not necessarily reflected in the program suppliers reporting process -- even though realized by the business unit and the company as a whole -- making the bottom line or effective tracking difficult to substantiate.

Karen S. • I believe it is the general belief of the customer / supplier relationship. For myself, I feel an integrated and seamless team should be a true shared investment. Savings would need to be further defined. Procurement generally has no understanding of true costs of the business overall and is only led to believe that a savings comparison on a piece of paper is all they must accomplish. There is generally no accountability for the outcome or the true costs at the end of the day. The intangibles are rarely costed into the price. The follow up and accuracy is extremely loose. An accounting nightmare, I would think for a large corporation. The cost of the employee, kept or lost, their training and overall benefits, intangible time that has no direct product cost recorded, etc are so watered down. I have on several occassions tried to do a deep dive on cost of part needed and it is amazing when they dictate a cost for machining and material and shipping when the amount requested barely covers the material cost alone.

Take the time prior to a quote to learn eachother's business models and needs. talk through the quote face to face and agree on a process and its outcome. Test it together. Come to an agreement and move forward from there. It takes time to build GREAT business and none to spend money foolishly.

mike H. • In a sales driven organisation any cost savings reflected in the product cost are often used to reduce selling costs to gain new business negating the savings acheived rather than increasing margins

Ian W. • In my experience, this is down cultural resistance either within a business or across globally displaced companies that then get's compounded by lack of senior sponsorship to mandate. You can only ask for so long, and any delay's results in a suboptimal outcome (generally). Karen's view on intangilbles is spot on as price is a great measure for analysing however cost benefits is a decidely ??? area.

Sherry S. • In our experience, it is based on the "low-hanging fruit" concept that so many companies want to "try" in terms of initiating or restructuring offshore procurement. We have often heard our clients express their interest to source a few high-volume products from China, Indonesia, India or another country. Yes, there are often savings. However, the real lift comes when companies agree to a more aggressive and comprehensive sourcing initiative. That is when the real savings surface. It is difficult to just "try" a sourcing initiative offshore and expect great results.

Tony C. • Karen, it seems you may have experienced a badly run program. I mentioned stakeholder engagement earlier - the right cross-functional team should be able to pick up on most of the issues you raise - and this must include engagement of appropriate sponsors as Ian points out. I have some practical guidelines at http://www.acuityconsultants.com/news.html#stakeholder_engagement

Picking up on Mike's point, the purpose and objectives of a procurement cost reduction program needs to be clear at the outset . I don't mean deliverables or cost targets, but the fundamental reasons and desired outcomes, which could be reduction in cost base to drive sales growth, or increase in margin. With the right team and steering group, uncontrolled concessions in selling prices can be avoided.

Sherry, I agree it is often necessary to be bold to make substantial impact. Some organisations try to offshore items that are really unsuitable, so it's necessary to consider the logistics implications and how you will manage the extended supply chain when offshoring.

Jim H. • A problem well defined is a problem half solved, so its important to do as much of the work upfront as possible.

Moni S. • Tony, excellent question. Three factors to consider:
1. Are the anticipated savings really coming? In soccer speak, dribble and stay with the ball towards the goal. This requires procurement team to stay on top, influence the front-lines making the daily buying decisions and make it stick. Once the limelight is gone, what is important is that the engineer picking components for his product design or the buyer making tactical buys are making the right calls per the procurement initiative.
2. Are there other unanticipated costs that are eroding your anticipated savings? In recent years, heavy upward swings in metal commodities and gas prices have eaten away generated savings. Procurement teams need to stay on top of the macro market dynamics, set real goals in light of those dynamics and find ways to mitigate for these counter trends (new materials, consolidation, etc.)
3. What portion of the created value are we capturing? Mike alluded to this before. As a corporation, are we managing towards the customer life cycle, how sticky is our product's value proposition and are we pricing for optimal profits?

Ray Y. • I think Sherry has a valid point about Senior Management chasing "low hanging fruit" benefits from a trial run. Unfortunately if that initiative stalls after the first trial the subsequent attempts will also fail as the "target" (the low hanging fruit) savings will have been taken and the returns will be deminished because savings from earlier attempts will not be seen as part and parcel of the process.

The targets have to be realistic and achievable.
Maverick spend must be identified and eliminated
There must be a routine review of all contracts and spend analysis to identify new targets.
If the sales team are squandering savings by maintaining the same margins through increasing discounts they must have their mindset modified.

To be effective the initiative nedds to start at the top. If the CEO doesn't need an "executive" pen to sign his name then niether does anybody else in the organisation. This principle applies to company vehicles, travel arrangements and gadgets as well as the humble Postit notes.

If a manager argues that their department is an "exceptional case" the CEO needs to be the final arbiter but take the standpoint of "If I don't need it, does the organisation need it?" Most managers would rather not have that discussion with the CEO but they will try to find a way to "work around" the new rules which is why monitoring maverick spend is so important.

Ken C. • Oh, the age old question of "how do you bring value to the organization", Tony.
I'd share two ideas to the discussion. (1) Inflation and (2) Sand-bagging. From the purest sense, savings are truly only captured when a valid price comparison from old to new concludes with a maintained lower price. Too often in inflationary periods, savings are documented to show "work" is being done, but the savings are lost because general inflation is at play. Secondly, in many business today, all of the BUs begin to sand-bag or figure out how to "beat the budget" in their silo, and there's not cohesive teams trying to better the company's bottom line. Therefore sourcing savings get consumed to cover an operation shortfall in a month; or they get consumed as mentioned above to retain sales or grow sales; they may get used by a BU to cover the cost of engineering projects; or they may be used to offset legal fees or HR costs. Or savings are captured/ hidden in a special tracking accounts, but when it becomes large and visible, it alienates corporate sourcing from the BUs if they are struggling to meet their budgets. At the end of the day, a truly strategic sourcing group delivers value and they should be recognized within all organizations --- simply need to have proper culture and communications.

Tony C. • Jim, Moni, Ray, Ken, thanks for your comments. There are some common themes coming through in "stay on top, influence the front lines", "maverick spend must be identified and eliminated", "cohesive teams trying to better the company's bottom line."
Your comments illustrate the dangers of an "us and them" mentality.

Ray, I agree maverick spend must be eliminated - and there is often the particularly difficult character who needs to be brought in line - but when a large percentage of the front line are exhibiting maverick behaviour there has to be something wrong with the way the programme is being run. I like and agree with your point on CEO/top down.

Ken, good point on the alienating nature of hidden savings - I've often seen large central rebates leaving BUs feeling they have been robbed or put under unfair pressure. I think "simply need to have a proper culture" is actually quite difficult to achieve and, if not (or on reflection you agree it is), would appreciate some tips or further comment.

I started the discussion with a view to writing some articles on various perspectives on this subject. I've covered stakeholder engagement (incl. sponsorship). This week I'm thinking about tactical/savings vs strategic/added-value programmes. Moni, I'm interested in your comment, "What portion of the created value are we capturing?" Could you expand on this please?

Regarding other perspectives, I'm still hoping for more ideas, so please keep the good comments coming!

Kultar S. • Solo saving plans may not be very fruitful.But savings by cross functional teams in given time having the cost saving target.One cannot actually save without factoring cost increases & quantity changes.The savings should not be limited to the product only which provides pricing flexibility/revenue generation but the savings, should leave room for innovation, improved quality, shorter lead times and not be a bottleneck on lowering the total cost all part of bottom line.Once it was said that 10% savings in material equalled 30% of the marketing effort which may be true today aswell.The savings look very small as compared to the turnover but have an eye catching share of the net profit.People at frontline are uncomfortable not on doing some savings but the results sometimes taken away by wrong means(sorry).

james P. • The savings that can be generated hit the bottom line if the plan is budgeted for and you work the outcome to be part of the profit target. Another major factor is staff costs if the initiatives do not change the biggest cost contributer to the business ie labor in our case, then the savings make a small impact to the bottom line. Furthermre the bottom line savings can recognised perhaps in the years to come as it can be the difference between receiving incremental CPI increases year upon year and not seeing them in the next year. So when the budget is set in the following year and it shows the same spend with increased revenue / throughput etc and increased profit from the previous year then you have acheieved a saving on the bottom line!

Sherry S. • I completely agree with what Karen and Ken have communicated. When each BU is operating under its own set of incentives, it is difficult for the organization to win. Right now, we are working with a client company whose sales, R&D, procurement and compliance teams all operate based on their own set of incentives. And they are all so different. Sales is, obviously, a top-line incentive. R&D is very much tied into sales. Procurement looks at FOB cost. And compliance just wants to keep all factories producing without surprises … whatever the cost. Without an overall corporate strategy that looks at total cost of ownership, no one wins. I think it is impossible for procurement (or sourcing or whatever you want to call it) to win when the goals are all counterproductive.

Tony C. • I agree with Kultar on the use of cross-functional teams - especially when looking for added value - and the team's success is reinforced by having a joined-up set of KPIs and incentives across the functions as Sherry suggests. I'll take up these points in my next article where I will be looking at added-value programmes.

James, you and other contributors have commented on the effects of inflation. When I started the discussion I was thinking in terms of real savings not being achieved, but you raise an important point. Not only can savings can be masked, but there is the possibility that the figures can be manipulated. One of the things that I think is important in any tracking mechanism is to ensure that deflation is not counted as a cost saving when prices are going down. For example in commodity markets where prices are cyclical, I might look at applying a specific market index to the original price and track savings against that rather than use CPI or RPI.

Chris G. • Tony- In addition to the effects of inflation, many overlook the effects of foreign exchange on long lead time items where the exchange rate can fluctuate substantially over the course of the order cycle. Negotiating foreign exchange escalation / de-escalation ahead of time can mitigate cost risk later on.

Moni S. • Tony, to elaborate on my comment "What portion of the created value are we capturing?" ...
I am talking about company's pricing strategy - it is the price that demarcates the value that the company keeps and the value that its customers keep. Cost reductions can enable a company on several fronts:
1. Keep pricing as-is for its existing customers and pocket higher margin.
2. Strategically reduce pricing to its existing customers for this product as an incentive on a bundled offer enabling new revenue / new profits.
3. Go after new customers previously un-served due to higher pricing. This taps into a totally new value stream.
4. #1 and #2 assumed that there is a fixed size pie and the company was determining how to slice it. Through the cost reduction initiative, the company may have increased the size of the pie. As an example, we developed a second source for a key sole-sourced part for a product. Due to astute negotiating and 2nd source's hunger for our business, we got a longer warranty period on this part along with lower costs. Now, if this longer warranty enables the company to offer a longer product warranty, we have expanded the pie size. Product marketing teams need to incorporate these enablers into their pricing strategies as well.

Kate R. • The fact that Supply Chain teams dont have access to a one true source of data to measure performance is a big issue. This article talks about how analytics can improve performance in pricing, planning and sourcing in supply chains. Any thoughts? http://www.operasolutions.com/solutions/supply-chain.php

Tony C. • Good point Chris. As well as potentially eroding savings, currency moves, and hedging, provide opportunities for procurement savings strategies. And, on relection, so does inflation/deflation... for example, by buying forward, trading stockholding costs against future price increases.

Thanks for the clarification Moni, and for making a very clear distinction between cost and value... a point that I'll take into my next article. Best practice procurement is about maximising added value, not necessarily about reducing cost.

Thanks for the link, Kate. One of the messages coming from earlier comments is that price and cost are only part of the equation. However, good analytics and benchmarking are important to get best price and identify cost saving opportunities.