Simple procurement optimisation for value beyond mere cost saving

By: Xavier Greyling

"Time is Money": a well-known proverb to demonstrate that "...time is a valuable resource, therefore it's better to do things as quickly as possible". Since its first use by Benjamin Franklin in 1748, to explain to a tradesman his true loss if just sitting idly and not earning a wage through labour, it has been used extensively by businessmen, companies and even statesmen to motivate and increase productivity.

If rarity is the benchmark for value, the single most valuable possession for mankind is a second. There will never be another particular second of a particular minute. Never again. There is only one! Therefore, it is exceptionally rare. It should be appreciated and cherished and, never ever be squandered. But, many activities either waste time or impact negatively on our abilities to use our valuable time effectively.

The sole objective of a procurement professional is to 'save money'. Sadly, many organisations still have a very narrow view of the discipline of procurement, equating it to purchasing. In this sense, the only way to 'save money' is to ensure suppliers lower their prices, or postpone upward adjustments (in line with inflation, hopefully) or obtain larger discounts, or get another supplier, etc. With ever-rising input costs due to greater demand on natural resources that are becoming scarcer (read: becoming more valuable, thus costly), weakening currency, (inter-) national political turmoil and a whole host of other reasons, to constantly demand lower prices or refuse requests for increases from suppliers, is an unsustainable business strategy. A procurement professional is required to become 'more productive'.

Too many procurement professionals are dragged into mundane, operational and time-consuming activities that contribute absolutely nothing to the company's bottom line. Many buyers and procurement supervisors or managers will agree that they just have too many purchase requisitions that "... must now be converted to a PO as a matter of extreme urgency or else..." this or that extremely severe consequence will occur. Procurement is not afforded the opportunity to procure properly and the part or service is ordered from the same supplier as "...last time...". Due to haste and urgency, price is not even discussed, and there is no time for negotiation. The end-user probably has already listed the items or service and price in some detail on the requisition, after requesting the usual vendor to deliver or perform the service. In this sense, procurement is seen as an unnecessary, time-delaying service department to the internal end-user that has already done all the work and the option of refusal is not available to procurement, nor should the procurement department dare to accuse the end-user of poor planning. What happens is that the procurement department does what needs to be done: rubber stamping. After all, no one wants to be that person to whom the finger is pointed as the sole cause of some catastrophic event because he/she failed to get a part on site in time or to ensure that a service was performed timeously. And, it is human to always want to deliver the best service to the customer, because the 'customer is always right', even if the customer knows that he has that right and knowingly abuses it to his advantage to cover his own shortcomings. As a result, the procurement professional is reduced to a mere procurement practitioner executing a mundane and repetitive administrative function.

If the procurement professional is to 'save money', it then follows logically that the individual must be able to 'save time'. The first opportunity to investigate, is to identify where multiple purchase orders, sometimes even for the same or similar items from the same supplier within a particular accounting period, e.g. a month, occur. a magnitude of orders on the same supplier for the same (or similar) product greatly increases the risk of an invoice query where the wrong invoice points to the wrong purchase order. To resolve this query is probably the most time-consuming and lowest value-returning activity for a procurement person. Identifying suppliers that regularly have invoice queries is then also a good starting point.

Investigations may also reveal multiple low-value purchase orders on the same supplier. The actual cost of a purchasing transaction varies considerably from company to company and industry to industry, and is directly linked to the level of procurement maturity of the entity. Labour costs of procurement personnel, (stores and stockholding) and finance personnel, licence fees for a purchasing systems (or the cost of manually-printed purchase order books), licence fees for the accounting software and the necessary stationery and hardware required for a transaction are all factors to consider in calculating the transaction cost of a purchase order. It then follows that if the number of transactions reduce, the associated cost per transaction is avoided. As example, if a purchasing transaction from end-to-end costs R750/transaction, 300 orders per month will cost R225,000. If, in the mix of 300 orders, there are 10 orders on the same supplier, the consolidation of the 10 orders into one will reduce the total transaction cost to R218,250 as nine transactions of R750 are avoided. However, purists will argue that labour costs are fixed and if there are now fewer transactions to perform, the actual transaction cost increases. Regardless, a reduction in the number of transactions has created time to enable personnel to investigate even more opportunities of cost or time savings. Setting high standards on administrative housekeeping such as filing will drive the individual's desire to create fewer documents. And, fewer documents lying around, but properly filed, reduces another exceptionally time-consuming activity: searching for misplaced documents.

If the buyer can isolate all the vendors on whom multiple purchase orders are placed, investigations may reveal that up to 10% less purchase orders need to be placed. This will also indicate other possible streamlining initiatives such as (i) consignment stock or vendor-managed inventory of a specific 'family' of items (e.g. stationery, PPE, engineering-type consumables) or (ii) the placing of bulk framework orders once a month for raw materials or (iii) consolidating a year agreement into one order with 12 line items. Once done, a buyer can achieve up to a 20% reduction in the number of purchase orders. Using the same example of 300 orders, the time per transaction increases from 32 to 40 minutes per order. The buyer now has created 8 minutes of extra time per transaction that can be used (i) to make phone calls to seek alternative, more cost-effective suppliers or (ii) to evaluate pricing through 'Request for Quote', ("RFQ") or (iii) to negotiate pricing. And, there is a direct link between the number of RFQs and monetary savings achieved: the higher the number of RFQs, the higher the (negotiated) savings.

There are further secondary benefits to order consolidation as well. Vendor (database) rationalisation is generally accepted as one of the first ports of call for a procurement professional. In companies with relatively low procurement maturity, where the 'buying' is done by many individuals in operations, one will regularly find that the same item (but maybe different manufacturer and/or quality) is bought by different employees from different suppliers. Designated Source Lists (if SAP MM is used) allow for vendors from whom a specific part may be purchased to be listed on the item's Material Master record. This 'Source List' should be reduced to two suppliers, at most.

The procurement professional must drive 'category management' that automatically rationalises the number of vendors listed on the system. A specific 'category' of items can be allocated to a supplier after thorough market research, RFQ and contract award. The large selection of suppliers that were available to end-users are now rationalised after due process has been followed. It further lends itself towards satisfying ISO requirements in respect of product quality and specification standardisation. In short, Procurement takes ownership of the relationship with the supplier. This allows operations to keep themselves busy with activities for which they were employed, namely the operations. It is also an effective tool to prevent maverick/rogue purchases and significantly reduces the risk of unethical purchases from 'favourite suppliers'.

To keep large vendor databases is costly. Certain ERP providers charge their clients per volume of data. Why have a supplier on the system with whom you last did a once-off transaction some five years ago?

A reduced vendor base also assists with audit requirements that dictate regular updating and administration, e.g. confirmation of banking details. This is a costly and time-consuming administrative activity, wasted on a vendor with whom no transaction occurred in the past five years.

Items can eventually be placed on 'contract' where pricing and delivery lead times are fixed. Price certainty aids budgeting and costing, and clear delivery lead times aid lean manufacturing and the attainment of 'Just-In-Time' ('JIT) delivery, thus freeing up value working capital.

The procurement supervisor/ manager can introduce the following 'procurement benchmarks', to be measured and tracked monthly, that will support the reduction in purchase orders:

  • Number of line items per purchase order must be greater than two;

  • Number of purchase orders below the value of R500 must be less than 1% of the number of purchase orders placed. In time, through procurement interventions, this can be reduced to 0%;

  • Monthly RFQs (system generated or otherwise) compared to the number of purchase orders to be greater than 1.75:1. In time, as more and more items are placed 'on contract', this ratio can be adjusted downward;

  • Number of invoice queries to be less than 2.5% of the number of purchase orders placed;

  • Vendors used to exceed 50% of vendors listed on the database;

  • The number of spares held in store (per material number) linked to replenishment contracts to exceed 50% of the total number of store material masters. As more and more contracts are put in place, this figure is to be increased.

The result of 'creating' time through purchase order consolidation (first port of call, reduce PO's below R500) frees up time for the Procurement Professional to pursue cost saving activities such as RFQ's (usually neglected because there ' no time"), which in turn results in increased 'negotiated savings'. The following graphs will illustrate the direct link between time, then having the ability to perform extensive RFQ's, using that market intelligence for Strategic Sourcing initiatives and the resultant increase in savings:

Figure 1: Reduction in Purchased Orders through consolidation of low-value, repetitive Purchase Orders resulting in increased time per Purchase Order


Figure 2: Increase in Ave time per PO enables the Buyer to issue more RFQ's resulting in increased 'Negotiated Savings'. Historical data now enables Strategic Sourcing on commodities/consolidated commodity categories. The drastic reduction in RFQ's, followed by a marked increase in 'Negotiated Savings' is due to the implementation of 'Category Contracts' linked to favourable/fixed pricing agreements.


In conclusion then, a procurement professional needs to create time to generate savings. This can be achieved through reducing repetitive transactions with the same supplier for the same or similar products.