Are Retailer-Demanded Price Cuts Killing Your Bottom Line?
Here are some cost reduction tips to help offset the financial impact of lowered retailer purchase pricing
Organizations today are spending as much as 60 percent of their revenue acquiring the goods and services needed to support their business. It shouldn’t come as a surprise, then, that for businesses that sell through big box retailers with price squeezing power, reductions in the area of procurement spending would appear to have the largest effect in offsetting the financial impact of lowered retailer purchase pricing. But how can you pinpoint where to cut those purchasing-related costs? Fortunately, analytics and reports that specifically measure supplier and buyer performance can help. Supplier analytics offer the visibility into supply spend that’s needed by financial, procurement and supply chain executives as they lead the charge to reduce overall procurement spend while simultaneously increasing the bottom line. As a matter of fact, research by leading industry groups has shown that with these types of analytical applications, businesses can achieve a 5% to 15% reduction in materials costs.
Purchase Price Analysis
The pricing metrics that are available in some of today’s enterprise performance analysis and reporting software suites can enable decision makers to gain greater control over material purchase costs and better manage procurement budgets as a result. Such analytics can show if purchase price variances are trending upward and how average purchase prices are affecting the procurement budget. In addition, these analytics can be further leveraged to compare purchase prices across vendors and time periods and to minimize purchase price overcharges.
Financial Analysis Assessing vendor payments over time is also critical in determining if your company is purchasing more or if your vendors are increasing prices for their goods and services. You can leverage financial analytics to better understand what discounts your vendors have offered for early payments, too, and determine the value of those discounts to your business now and over time. Plus, they can help you assess whether or not your business uses the discounts and to negotiate better terms in the future. The end result?
- Consolidation of Spends: The visibility provided by ongoing analysis of your suppliers will provide you with an opportunity to consolidate spend and take advantage of volume discounts if different business units buy the same products and services from a wide range of suppliers.
- Ability to Leverage Supplier Rebates: You’ll also gain the ability to request rebates on money already spent when spending levels are determined to be higher than previously thought by your buyers or suppliers.
- Better Contract Negotiations: Unprecedented increases in spending that are uncovered by vendor analysis and reporting software may represent contract negotiation opportunities for you. In addition, large spending areas may present opportunities to “renegotiate” existing contracts for better rates.
Delivery Performance Analysis Further measuring the delivery performance of your suppliers can also be key to better understanding and reducing costs that are directly (and indirectly) tied to your vendors’ delivery of materials. For example, this type of analysis can help you minimize incorrect items and quantities, reduce short deliveries and eliminate excess orders ― all of which can wreak havoc on (and substantially inflated costs related to) warehouse space, production schedules and customer service levels.
Lead Time Variability One other strategic way that vendor performance analytics can help in the area of procurement cost reductions is in tracking and evaluating supplier lead times to understand their impact on the supply chain and help you mitigate problem areas more efficiently. For example, the insight provided can be leveraged to minimize late supply deliveries that can cause production run delays, increased labor costs, and compromised service levels. In addition, the visibility that you gain into lead times can help your business reduce the number of deliveries that are received earlier than expected, which can negatively impact carrying costs, warehouse space and related resources.
While procurement spend is just one area in which cost reduction opportunities exist, it no doubt represents the largest potential for most businesses to tackle in the wake of retailer-demanded price cuts. Plus, it’s a fairly easy initiative to undertake using business analytics and reporting applications that drive valuable insights from your purchasing and other core business data.