Part of the Governments plan is to ask staff to suggest savings. Often it is the people at the sharp who can suggest process or procurement change that could have significant impact and help identify savings. It may seem obvious but engaging with staff that procure and use services or suppliers is an essential part of any business model. Not only does it help to create a culture in which savings are valued but also means that the staff have bought into the process.

At Expense Reduction Analysts we will always seek to engage with the stakeholders at the earliest opportunity to understand what is important to them and equally what is less critical to them. For example in my previous blog I spoke about how moving to consolidated invoices could benefit a business. It is surprising how many times we have spoken to a stakeholder who has complained that they have received an invoice for a small value item!

Drawing upon the ideas of your staff is very useful and insightful, but also consider how do other businesses do similar things? Whilst your competitors may be reluctant to tell you what they are doing there are other options. For example we publish a range of cost reduction guides on our website. These guides are free to download and may provide a flash of inspiration. Similarly our network of project specialist are often being asked to write articles or provide information for professional and trade journals.

An email, phone call or comment on the article may start a discusion that again provides an inspiration

Our Client’s team had ticked all the obvious boxes; they had negotiated no delivery charges and no minimum order size. The rate they were paying was also very competitive. The staff would check the prices of each supplier to make sure they were buying at the best rates available to them. On the face of there was little that the process could be improved upon.

However, what concerned me was the number of invoices; The Chartered Institute of Purchasing and Supply1 have cited on their website that the average cost to process an order from placing the order to paying the invoice is around £50. Whilst this figure is not cast in stone it’s a good benchmark when you consider the time spent selecting a product, writing an order, checking the invoice, entering it onto the system and then paying the supplier. In this case it may be costing our Client around £12,500 per year to process all these small orders!

There were two ideas that I thought might help my client:
• Firstly rationalise their buying, in that only order stationary, once a week or once a month. This does mean setting up and managing stocks of a stationary store, but the time spent once a week and placing an order would mean potential only 52 orders per supplier. Even placing four orders a week could potentially save £2,100

• It was also suggested that they may like to look at consolidating their invoicing. Instead of getting an invoice it may be that the suppliers may request better terms than the 30days they are on, but if they process 4 invoices a month or 48 invoices annually they could potentially save £10,100.

Organisational changes such as this are often intangible and difficult to spot, but in reality the £10,100 they could save a year is staff time that could be deployed to areas that are more important to the business!

1http://www.cips.org/professionalresources/faqs/details.aspx?id=73

The Department for Transport has recently published its annual Road Freight Transport Statistics Bulletin 2009, and interpreting the figures provides a fascinating analysis of the changes occurring in the Distribution Sector. This year’s publication is significant in that not only does it show the impact of recession when compared with 2008, but also as the 20^th edition, showing the fundamental changes over two decades.

Unsurprisingly, total tonnage uplifted declined markedly in 2009 compared to the previous year, but the balance of goods moved between different sectors has continued recent trends.  The volume of food and drink products has been at a stable 370 million tonnes for three years, after a fairly constant upward trend, whereas all other categories declined, noticeably Bulk Products, which fell from 620 million tonnes to 440 million tonnes year on year. Perhaps worryingly for British Manufacturing, this compares with levels of over 600 million tonnes being uplifted in this sector even during the recession years of the early nineteen nineties.

Analysis of usage by vehicle type shows artics moving 58% of goods compared to just 40% in 1989.  Not only does this show the impact of increased vehicle weights on improving efficiencies, but also goes some way to explain why unit haulage rates have failed to keep pace with inflation, whilst still allowing haulage businesses to continue.

However, from a cost analysts’ perspective, the most interesting statistic must be the change in the proportion of goods being moved by own-account vehicles versus 3^rd party hire and reward hauliers. In 1989, hire and reward operators uplifted 60% of goods (by weight), declining slightly to 57% in 1991 as the recession bit. However, with a trend for more companies outsourcing logistics functions, this then peaked to 67% in 2001. A gradual decline to 61% in 2007 has then been followed by big drops to 51% in 2009. Actual volumes for the hire and reward centre have dropped from a peak of 1,145m tonnes in 2007 to just 723m tonnes in 2009 – a 47% drop ! Undoubtedly, the impact has been large numbers of providers disappearing from the scene with record administrations and insolvencies in the sector, and the survivors following rigorous cost cutting programmes and capacity reductions. For the future, however, from the service procurors perspective, this means reduced competition as hopefully volumes begin to recover.

Although the own account sector suffered a small volume reduction to 699 million tonnes, this was still the third highest volume moved in this sector since 1989. However, the sector moved its goods further than any previous year and therefore recorded its highest ever tonne kilometre measure. The re-emergence of the own account sector must be a relief to suppliers of fleet services: our internal data shows that margins charged on fleet supplies (eg fuel, tyres, maintenance, fleet insurance, etc.) are consistently higher than being achieved by the same suppliers to the hire and reward sector.

Therefore, despite the fact that own account operators are working their fleets harder, there are still major opportunities to improve their cost base through detailed effective procurement reviews.

I was impressed with many of the pointers in Visa Europe’s, first whitepaper aimed squarely at helping the hospitality industry safeguard customer data http://www2.visaeurope.com/documents/ais/hotelbreach_europe_2.pdf . Under the title ‘Hospitality Breaches on the Rise’ it also offers insight on how cyber-criminals target hotels, as well as the  guidance I already alluded to on how data can be protected to help businesses comply with the Payment Card Industry Data Security Standard (PCI DSS).

Hotels often have more complex payment systems than other retail businesses, making it harder for them to achieve PCI DSS compliance. Compared with some retailers who might have only one point-of-sale, customer card data is often captured, stored and retrieved at multiple pay terminals within hotels – such as the reservation desk, restaurant, bar, or for room service, internet access and online bookings.

Cutting to the chase, the tips that impressed me are:-

• Change vendor-supplied defaults for passwords or other security information for Hotel Management Systems (HMS) and Point of Sale (POS) payment systems. The HMS is the central and core component in which cardholder data is stored, processed and transmitted to perform authorisation and settlement across other payment terminals in the network

• NULL sessions (unauthenticated connections to a Windows computer) should be disabled. This is the number one method for hackers to gain information on passwords, groups, services and users

• Install and maintain a firewall to protect data. HMS and POS payment systems should not be directly accessible via the Internet; inbound traffic should be blocked and outbound services should be filtered

• Assign a unique ID to each person with computer access and implement a dual-factor authentication method for remote system access via the Internet. This will mitigate unauthorised access into HMS and POS payment systems

• Track and monitor all access to network resources and cardholder data to track and monitor anomalies and suspicious attack activity

Cardholder data held by hotels is a potentially lucrative source of information for fraudsters who obviously view the hospitality sector as an easy target. By understanding the nature of security threats and the preventive measures that can be taken, managers in the industry can reduce the risk of compromise. The losses from fraud can be significant both in terms of bottom line cost and negative reputation.

Actually implementing the above measures may require specific expertise in some instances, but many are simple management practices. In Expense Reduction Analysts we certainly encourage all our clients to introduce (or maybe just re-invigorate) such practices as easy ways to protect profit, reduce losses and preserve reputations.

“Apart from the financial rewards of reducing expenditure, our work with Neill Summerfield and his team in securing service level agreements and key performance indicators from suppliers has encouraged people within the Academy to be more focused on working pro-actively to ensure that we receive the best possible service from our supplier base”

Importantly the decision to engage Neill Summerfield and his team of cost management consultants was supported by the Executive Management Board and the Board of Trustees. Progress in finding sustainable extra profits for the RAD is reported to both teams on a monthly basis.

A big theme of the emergency budget was (unsurprisingly) efficiency of public services. The Chancellor has committed reductions in planned public spending starting at £23 billion in 2011/12, and rising to £99 billion in 2015/16.

This Guide, produced by the Centre for Cost Management, responds to the challenge of efficiency savings in the public sector.

Click here to download white paper

Whilst much of the current growth is down to Barclays’ decision to issue contactless cards as standard for all UK customers, the other UK banks are likely to be more aggressive shortly.  We in Expense Reduction Analysts’ Banking Team expect to see most of the major High St Bank’s card acquiring arms working with retailers to encourage wider adoption.

Visa believes the recent rise in the contactless transaction limit from £10 to £15 is helping to make the cards a more attractive proposition for users and retailers.

Currently around 26,000 outlets are enabled for contactless and average transaction values are around the £4.30 mark, with evidence emerging of a surge in use among cardholders. Mark Austin, head of contactless at Visa Europe, said that in the last six months they had seen an increase of 100% in transaction volumes. So a groundswell of acceptance of the technology is growing. I will blog around that issue when I have more information.

For many of our clients its not around being an early adapter but more around recognising how customers, and potential customers, wish to carry out low value/high volume purchases. Moreover, maintaining the profitability of transactions is absolutely crucial. For my part that means ensuring that the actual real transaction costs are understood, rationalised and – where uncompetitive, challenged.

Equally disappointing were the sales and profit figures for consumer services over the three months from March to May published by the CBI: Leisure and personal care as well as hotels, bar and restaurants recorded not only markedly lower sales but also drops in profitability and optimism. These latest numbers cast serious doubts over whether the private sector will be able to compensate for the public sector spending cuts. This morning, the Office for Budget Responsibility (OBR) has downgraded the growth forecast for the British economy to 2.6% from Alistair Darling’s more optimistic 3.25% announced in March.

The latest IMD World Competitiveness Yearbook should make uncomfortable reading for British businesses: Of the 58 economies ranked along 300 criteria, the United Kingdom ranks 22 (down one place from last year) with a score of 76.808 as opposed to the 100 points for the leader Singapore. There are undoubtedly a few lessons to be learnt from the IMD classification: The leading countries not only benefit from strong demand in Asia, but also stand out, according to the IMD, by their low levels of debt and deficits.

For the first time, the IMD has also presented a ‘debt stress test’, measuring when the nations’ debt levels will revert to a ‘bearable’ level of 60% of their respective GDP. On the back of the global economic crisis the deficits of the major industrial nations have been soaring, and, as far as the G20 countries are concerned, the IMD expects the average debt to rise from 76% of GDP in 2007 to 106% in 2010. Therefore, although the recession is behind us, its consequences will likely be felt for some considerable time to come. The UK economy, according to the Swiss researchers, is not expected to reach the 60% debt threshold until 2028.

The Prime Minister has set the tone for the budget cuts to come in his speech earlier this week. My personal suspicion is that the well orchestrated and highly publicised announcements over the past few weeks are setting the stage for potentially worse than expected cuts when the Chancellor announces his budget on 22 June: Rumours of a VAT increase to 20% (or potentially higher?) are rife, as are indications of a cut in free school dinners for the poorest and an increase in tuition fees and Capital Gains Tax. There can be no doubt, higher taxation – and in particular an increase in VAT – will inevitably lead to fall in consumer spending, as recently suggested by Stephen Robertson, the Director General of the British Retail Consortium, in an interview with the BBC. As far as the impact of a potential VAT increase on Charities is concerned, please see my blog posted in February.

Up to 725,000 public service jobs could be lost over the next four years and spending cuts could push unemployment to nearly 3 million by the end of 2012, the Chartered Institute of Personnel and Development’s chief economic advisor, Dr. John Philpott, stated a few days ago. Similarly, in a letter to Chancellor George Osborne, the CBI’s deputy director John Cridland agreed that a radical re-engineering of public services was necessary if tax rises were to be avoided, stating that ‘only an effective cost reduction strategy can safeguard future growth’.

This last point surely should apply to all of the economy, and Expense Reduction Analysts’ experts are ideally placed to ensure your organisation achieves best value for its money, not only today but every day.

 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.