Improving Profit Through Better Procurement
Reducing Procurement Costs Whilst Maintaining Service Levels And Deepening Supplier Relationships.
What was the challenge?
A successful consumer electronics retailer recognised that their market dynamics were changing and that, in order to maintain margins, they would need to reduce costs. Their annual cost of goods for resale was more than £800m and this was expected to rise to more than £1bn within three years. The supply side was dominated by a small number of large suppliers who had considerable influence and were therefore able to manage pricing.
Our task was to significantly improve the net margin on cost of goods for the client whilst maintaining service levels and deepening supplier relationships.
What was the approach?
The first steps for our team were to scope and quantify the extent of the opportunity, identify the key levers for negotiation and thus prioritise specific savings. A detailed market and competitor analysis led to the development of a series of benchmarks which enabled the client to compare the costs that they were paying with those in other international markets and the costs being paid by their direct competitors. To supplement this insight, a full product cost analysis enabled the client to understand how costs and margins were distributed throughout the product value chain.
We also assessed internal factors and found that the buyers did not have sufficient time to do in-depth analysis and complex trading terms made it difficult to establish the true day to day margin. It was also clear that the drive for buyers to hit targets commonly led to overstocks and financial write downs.
As a part of the programme we introduced new tools and techniques so that the buyers were fully prepared in all negotiations. We ensured that they had access to comprehensive market and supply data and that they prepared clear negotiating strategies before engaging with suppliers.
How did we help?
Through the course of this project the supply contracts with all major supplies were simplified and historic incentive payments were built into the invoice price for the goods. This enabled the future incentives to be based on real, in-year objectives and significantly reduced the overstocks and financial write offs. We also used the consolidated demand from multiple group businesses and grey market sourcing in order to negotiate better pricing with suppliers. In addition to this we established stronger relationships with smaller suppliers so that they became meaningful competition to the larger players.
As a result of this project the negotiation techniques were significantly improved, the balance of power with major suppliers was redressed and the client achieved an annualised saving of £83m in the cost of goods.