Before we look at “how?”, let’s start with “why?”. Should costs be a priority, or is the most important thing increasing the sales line?
Depending on margins, addressing costs can be every bit as good a way of increasing profit as growing sales. Let’s say your margin is 20%, so that extra sales of £100,000 delivers £20,000 gross profit – often it needs less resource to reduce costs by £20,000 and achieve the same result.
What type of costs are we talking about? I specialise in “Indirect Costs” – sometimes known as overhead costs. We don’t include payroll within indirects, but it’s such a big cost to most businesses that I have to say something about it here.
How do you manage payroll costs within your business? Sometimes we focus on hourly rates and annual salaries, but that can be short-sighted. Here are some great ways to manage these costs –
- Pay the right wage for the job – that way you’ll have motivated staff who will be more efficient, you’ll have fewer vacancies to cover by paying for temporary labour and the cost of recruitment will be much less.
- Right-size your workforce. Procurement (which is what I do) is great, and getting the best price is vital, but often there’s just as much to achieve by “right-sizing” in lots of areas. Cut out waste, and don’t pay for something 52 weeks a year which you only need for a month. Does that apply to your workforce as well? Maybe you have some roles you don’t need all year – dispatch staff at Christmas, or an accountant who is busiest in the days after month-end. Pubs, shops and restaurants are very adept at flexing work rotas to make sure they have staff at busy times so they can make sales, but just a skeleton at other times (think midnight at the supermarket). Lots of other businesses can follow the same principle with flexible hours, bank staff or even hiring agency workers just for the busiest times.
- There’s also the opportunity to look at specialist roles. Do you, as a business owner, look after payroll or HR when there could be many more profitable uses of your time? Do you need a bookkeeper to work in the office? Outsourcing is a great way to save costs in lots of disciplines – the professional hourly rate is off the books, and only paid when needed, and very often the skill levels are higher than a small business could fund in house.
Great examples include IT Support, Payroll, HR and bookkeeping. Try and use your business network so that you can find outsource partners by recommendation which can be much more reliable than those online reviews.
Now, let’s have a look at some of the key drivers which should influence our procurement decisions.
Let’s take a lesson from Goldilocks – the first bowl of porridge was too hot, the second bowl of porridge was too cold, but the third bowl of porridge was just right!
We should always make specification the starting point for purchasing decisions – after all, if we’re not clear what we’re purchasing we may end up with frustration, overspend and goods which don’t really meet your business needs.
Let’s think about a delivery van –
- Too small, and you may pay for driver overtime as the van has to keep coming back to base. Alternatively, you may incur costs from using a third-party carrier.
- Too large, and you’ll have higher fuel bills, higher insurance and higher monthly lease payments.
- Just-right takes into account the size of load, an optimised delivery route, and a realistic estimate of future growth.
Yes, we’re back to “right-sizing” again, and for a van, that might mean your specification includes engine size, payload and annual mileage. It’s always worth getting the basics clear before starting the procurement process.
Often it’s worth being a bit flexible as well – do you need a particular colour vehicle, or, for example, does it need to be new or could an ex-demonstration vehicle be cost-effective?
Changes in technology take place at an exponential rate, so how will new technologies influence your buying decisions?
Driverless vehicles are starting to become a reality, and here in the UK, we have vehicles which park themselves, vehicles with cruise control and vehicles which stay in lane and brake automatically on the motorway. Mobile phones are now much more than phones, keeping us connected day and night, running multiple apps and using QR codes to launch software or log location.
Individual businesses must decide how far the cost of extra technology is going to deliver opportunities or efficiencies. Can you see a clear benefit which you can monetise or are you being sold features and benefits where there will be a limited opportunity to obtain a return on investment?
Have you incorporated technology into your specification? Are you buying, or are you just being sold to?
One of the keys to effective cost management is to source through the right supply chains.
Every industry not only has multiple suppliers but multiple types of supplier. Think about mobile phones – there are the main networks (Vodafone, EE, O2, Three) and you can buy from them direct. Other brands use the same infrastructure and arguably deliver the same, or even better service, such as Virgin, Tesco and Asda, with satisfaction surveys rating them higher than the networks themselves, costing less and offering better customer service. Finally, you can use third-party resellers such as Carphone Warehouse to enter a contract with the main network.
Often, we see products being purchased from the “wrong” supply chain – printer paper from a cleaning company comes to mind – the cost was high, but it was convenient. That may be a good decision for a one-off, but once it becomes a regular purchase, the extra margins in the supply chain soon start to add up.
For many smaller businesses, Amazon appears to be the answer to a lot of procurement challenges, as it’s a source for a wide variety of products, mostly at competitive prices. We see a lot of businesses where staff spend hours each week buying online, and while they’ll often get good pricing, it’s often no better than using more traditional supply chains.
There are a number of disadvantages though, such as inconsistent specifications, unclear returns policies, and above all, staff time spent researching and ordering goods along with managing the paper trail for individual transactions – order forms, receipts, expenses, etc. Once that time is taken into account, the true cost of online purchasing may look much higher.
So how can we tell which is the right supply chain in a given situation?
- Does it offer best cost, or very close?
- Are the goods or services fit for purpose? Consistently?
- Do you get what you need when you need it?
- Does it integrate into your organisation easily? (No soft costs, maybe added services)
Price & tariff
Once we have identified clearly what we need, and perhaps a short-list of potential suppliers, how do we go about securing the best price?
Often the first question is about the type of purchase – is it a one-off or a repeat purchase?
For a repeat purchase, you’re looking for a supplier who not only offers great prices right now, but has good continuity of supply as well as giving price sustainability. Are you able to group together a number of products so that your total spend is more attractive to suppliers and they are willing to reduce their margins? How long will they commit to hold prices for?
One of the best-known stationery companies sends monthly promotional leaflets which offer great prices for pens, paper and other key items for the office. The problem is, the prices go up the next month to be replaced by different promotions. Very few customers keep track of the best value product. That gives the supplier a great margin opportunity. Again, are you buying or being sold to?
Regularly tendering your requirements will help your business to achieve consistently good pricing. How you assess a tender is up to you – maybe it will be all about price but you can always introduce a scoring matrix to capture other key features. Examples include quality and delivery lead time. Bringing value-added features into the equation can help you move more towards a strategic partnership with key suppliers.
The considerations for one-off purchases can be different. Typically, a lot of companies will adopt a “three quotes” approach. Increasingly, that is based around an internet search, but this can be misleading. Shopping on Amazon means that ‘the price is the price’. Also, we’re used to comparison sites for insurance, energy and travel. There are many goods and services, as well as many suppliers, where it’s still far more effective to interact and negotiate.
Perhaps you’d rather do business with a local company, maybe a supplier you have traded with for years? By all means, use the internet to research the prices which are available but it often works out better to use that as a negotiating point with a supplier you know and trust, rather than relying on online reviews for a company you don’t otherwise know, but offers great prices.
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- Reducing costs in your business - January 6, 2021