10 Free Tips to Get You Started with Cost Management

Given the economic circumstances, a focused approach to cost analysis and management cannot be overestimated. An often overlooked fact is that it is easier to control costs than to create new sales. Considerable investment (not necessarily financial, but also in terms of staff and time) may be required to achieve the extra turnover (or sales) your business needs to achieve in order to match the impact of cost savings: A business yielding an average net profit of 8%, for example, would need to create extra revenue worth £100,000 in order to achieve the same result as a cost reduction of £5,000 per year.

 Nevertheless, a structured approach to cost management comes with its own challenges:

1.     Get the Stakeholders Involved

In order to be successful, any cost management exercise will need to be supported by all stakeholders, most importantly the staff members most involved with a given supplier. They are likely to know best your current providers’ strengths and weaknesses and will have built trusting relationships with the suppliers’ staff. These bonds are crucial when negotiating prices or resolving problems.

2.     Set Your Benchmark

In order to maximise savings you will need to accurately benchmark your spend. And don’t just concentrate on the top 10 items in a given category, as this will often invite suppliers to make concessions on these core products while adding the margin ‘given up’ back on to the prices of the remaining items sourced.

3.     Do Your Research

Once you have established your Benchmark, do your research as far as supplier selection is concerned: You probably don’t want to trade lower prices for reduced service levels. Hence, you may want to talk to a prospective supplier’s existing clients and/or seek clarification on service levels by submitting a written questionnaire.

4.     Tender Your Spend

Each supplier will have its own core strengths and product lines on which they are more competitive than others. Only a comprehensive competitive tender based on the 80/20 rule (20% of your products purchased will likely represent 80% of your category spend and hence should be included in the tender) will allow you to measure the overall impact of the proposed prices on your category spend. Moreover, check for variations in the proposed service levels and consult with your stakeholders. Invite the winning contender (and possibly runner-ups) for face-to-face meetings.

5.     Beware of Loss Leader Prices

Suppliers will always tempt you into their shop (or onto their website) with special offers, often at cost or below cost prices. Make no mistake though: The lost margin on these items is recovered by higher prices on the remainder of the product range. And since you are likely to pick-up a few other items because it is convenient, your may well have spent already the money saved on the loss leader product – and potentially much more than what you would have paid for the same basket of goods elsewhere.

6.     Are You Ordering the Right Items?

Your suppliers will grant you the most competitive pricing (i.e. the deepest discounts) on the most frequently purchased items. Now that you have identified these products (step 2 above) and negotiated the best prices (step 4), you will need to make sure that your staff order these items and not any other products serving the same purpose. Failing to monitor your purchasing will very quickly lead to an erosion of the savings you hope to achieve.

7.     Check Your Suppliers’ Invoices

You would most probably check the goods delivered against the list of goods ordered. But do you check your supplier invoices? Invoicing errors are increasingly rate, however, as many of Expense Reduction Analysts’ category experts can confirm, they still do occur. And while they may only be for small amounts in each instance, these could add up to a tidy sum over the months.

8.     Monitor Service Levels

Again, this will require stakeholder involvement: Particularly where a new supplier has won your business, make sure your staff are happy with product quality and service levels by formally measuring satisfaction on a regular basis (i.e. quarterly). Any issues which go unaddressed could detrimentally affect the business relationship with your supplier and potentially even undermine morale within your organisation. And even where the incumbent supplier has retained your custom, make sure they continue to provide your staff with the expected service levels as the price reductions obtained may have proven all too tempting to cut some corners on service levels afterwards.

9.     Challenge Price Increases

There will always come a time when your supplier will want to increase his prices. Some of these price rises will be manufacturer driven and could be due to a number of reasons such as rising oil prices, or weakness of the Pound Sterling against the Euro and/or the US Dollar. However, some supplier will also always be tempted to sneak in a few extra percents to boost their own profit margin. Also, bear in mind that not all suppliers will adjust their prices necessarily at the same time which may temporarily distort the market. And, finally, if you are handed down a price increase due to price fluctuations on currency and commodity markets, don’t expect an automatic price reduction should the picture reverse. But there is no harm in asking for it!

10.Have Your Needs Changed?

As businesses evolve, their needs change too. It is therefore important to start the process again every few years to ensure that you still get the best discounts on the most frequently purchased goods and services. Moreover, supply markets change faster than ever with technological and product innovation allowing providers to offer their goods and services at ever lower cost. In this respect, keep an ongoing dialogue with your suppliers and find out from them what is changing in their industry and how it might affect you.

Following the above ten steps will take time and resources, but, if taken seriously, the success is guaranteed. On the other hand, Expense Reduction Analysts not only offer the relevant category expertise but also the time and the manpower to complete this process for you, keeping you informed all the way while working to your brief, offering you the services of a fully staffed procurement department without the associated fixed costs.