There are costs that are plain for everyone to see, and then there are costs that may be less obvious. For example, costs associated with sub-optimal procurement processes could represent a substantial unnecessary expense for your organisation. But how do you identify such hidden costs? And more importantly, how do you eliminate them?
First consider what happens in your organisation when someone realises they need to buy something? Are there well-established documented processes in place? If so, they should be easy to map. Or does everyone just “do their own thing” as best they can? Procurement processes may include:
- A requirement to tender spend above a certain threshold, and to re-tender every X years.
- Requirement to obtain multiple quotes.
- Purchase-to-Pay process with built in approval limits, PO generation, invoice reconciliation, receipting and payment.
- Formalised system/methodology for managing and resolving supplier quality issues.
- Buying off an online catalogue for certain low-cost commodities.
How much does it cost you to transact with suppliers? To get an estimate of that you can “follow” a transaction through the system from the time someone makes a request to the supplier is paid (Requisition-to-Pay process). What are the steps? How much time is spent performing tasks at each step per transaction? How much are the people paid performing these tasks? Figueres don’t need to be exact – this is just to get a high-level view.
Once you have mapped your procurement processes, you will start to get an idea of how effective they are and what the hidden costs are. For example, to get an idea of what the Requisition-to Pay process is costing you, simply multiply the per transaction process cost estimate with the total number of transactions in a year. This will help quantify the benefits of reducing number of transactions as well as generate ideas of possible process improvements.
The level of compliance with current processes may also be an indication of how fit for purpose they are. If it becomes too difficult or time consuming to comply, people will start to use work-arounds. Measuring the level of compliance, therefore, becomes an important indicator.
So, what do you do once you have identified where there is potential for process improvements? The good news is that you are already halfway there. You have already defined the problems and gathered a lot of information about the processes, who interact with them and what they are meant to achieve.
Next, you need to get the people together that are best placed to re-design these processes. Take a step back and consider how you would build these better processes from scratch. Re-think them! Brainstorming may be a useful tool, but other techniques may work just as well. No matter what creativity or idea generation framework you use, always check that the new processes are:
- Transparent and consistent.
- Able to reduce risk by holding people accountable and safeguarding the organisation’s resources.
- Difficult to manipulate.
- Easy to interact with and understand.
- Free of unnecessary non-value adding steps
Once you have achieved as much of the above as possible, do an assessment of the costs the new processes represent, similar to what you did when assessing the existing processes. That will give you an indication of how much hidden costs you have freed up.
To learn more about how you can optimise your procurement processes, contact our Managing Director, Armand Brevig, today
