The REAL Cost of Saving Money

One of the common misconceptions about procurement is that it always saves your organization money. In fact, that is not always the case. The REAL cost of saving money is lost time and effort. Every purchase is different and not everything is a commodity such as a pen or a printer. You need to distinguish between commodity purchases like office supplies, and strategic purchases, which are those goods and services that are essential to the success of your business.

Without making this distinction, you will make poor purchasing decisions and spend even more time fixing those bad decisions. In my experience, it takes three times longer to fix a problem once it occurs than it would have taken to plan on how to avoid the problem in the first place. That is a lot of avoidable, wasted effort.

Organizations are treating every purchase the same way and forcing their business partners to respond to long, legal-sounding documents when the focus should be on finding the best solutions for the best value. Risk aversion and a focus on bottom- line savings are forcing companies to spend more money and effort than is required. And there are still many bad decisions being made that have to be reversed.

In order to drive better return on investment through your procurement operations and make better buying decisions, you need to focus on outcomes for those strategic purchases. Determine the types of purchases that are most strategic and essential to your organization and select an appropriate approach for buying those goods and services.

It is important to focus on the outcomes of the purchasing process. That means answering the question “What do we want to achieve through buying this good or service?” Typically, organizations start with the answer. “We need a workshop,” “We need a new technology system,” or “We need a strategic plan.” Take a step back and ask why you think you need these things. I questioned some clients recently on these issues.

  • I asked one client, “Why do you think you need a workshop?” Their response was because their sales representatives needed to learn how to more effectively sell to a changing customer. But a workshop would not have been the most effective way to do that and would not have yielded the results they needed. They required a new approach to selling, which meant changing the message they delivered, how they delivered it and to whom it was delivered.
  • I asked another client “Why do you need a new technology system?” Their response was because they wanted a more standardized way of operating. A newsystem would only have exacerbated their problems because they would have been making bad decisions faster. They needed to fix their operations and business processes before automating anything.
  • A third client asked for a strategic plan, so I asked why they needed a strategic plan. The answer, “Because we need to know where we are going to be in the next five years.” After some discussion, we agreed that what they really needed was an execution plan. Their strategy was fine, but they didn’t know the first steps required to execute that strategy.

The Ontario government made a decision recently to select one supplier for a popular drug that many patients required. Unfortunately, the one company that was selected to supply that drug had a fire in the manufacturing plant that produced it, thus leaving the entire province in a severe shortage. This problem could have been avoided.

The government focused on the lowest price and not the best solution. They pushed all suppliers to cut prices dramatically, thus pushing competitors out of the market, instead of focusing on the importance of supply and choosing two suppliers to mitigate any supply issues. By not planning effectively, and not recognizing the risk of a supply shortage, the Ontario government was forced to spend hundreds of thousands of dollars to resolve the issue, and many patients did not receive their medication on time.

When you attempt to buy what you think is the right solution, you can take yourself down the wrong path. Focus on the outcomes you want to achieve, the problems you want to solve or the differences you would like to see, and then work with your business partners to develop the best solution. If you ask for a green widget, people will quote you a price for that green widget. But what if there is a blue widget that will last longer, is better quality, has more capabilities and only costs a few cents more?

You will never know because you didn’t give your business partners a chance to show their capabilities. Which in the end, costs you more than you save.