Procurement departments are often measured by their ability to negotiate the most favorable terms and generate savings for the organization. As a result, procurement typically focuses their time and effort negotiating the next contract, seeking pricing concessions, seeking rebates and driving toward purchases that result in measurable “savings.”
However, procurement departments often lose focus on contributing factors that can cause money to fly out of the door. Below are seven factors for procurement departments to consider when seeking to maximize savings opportunities.
1. Strong CPO – Top procurement departments have a Chief Procurement Officer (CPO) that reports directly to the CEO or CFO. Failing to have a CPO reporting at this level can result in a decentralized department and decisions that do not align with the overall corporate direction.
2. Strategic Procurement Plan – The CPO should lead the process of yearly and multi-year procurement planning. A well organized and executed plan will maximize purchasing power in alignment with the organization’s goals and culture.
3. Contract Management System – The days are gone when contracts, amendments and addendums are stored on the shared drive and renewal terms are tracked in Excel. Failing to use a robust contract management software package exposes the organization.
4. Evergreen Contracts – Utilizing evergreen contracts results in decreased focus on contract terms and the vendor relationship. These contracts reduce the organization’s ability to negotiate timely.
5. Maverick Buying – Top procurement groups have policies and measures in place to minimize maverick spending in the organization. This type of spend is often overpriced, not tracked and exposes the organization to overcharges. Maverick spend also often leads to budget issues.
6. Budget Tracking – Failing to track budgets to AP spend and investigate issues exposes the organization to additional cost, pricing errors and potential fraud.
7. Regular Contract Audits – There are contract compliance issues that can only be discovered through a detailed review of vendor billing records. Many procurement departments fail to exercise standard audit clauses to ensure negotiated savings are being realized. This process can be performed internally or outsourced to an experienced group that can identify billing issues and help to recovery funds for the organization.