We talk about your ‘Total Procurement Cost’ which is made up of two components:

The PRODUCT cost  - the actual price of the product - easily defined, transparent cost.
The PROCESSS cost - the actual cost to the organisation to order, receive, pay, store and account for the purchase - not so easily defined, hidden costs and by virtue harder to manage.

The Gartner Group quote that on average the product cost only represents 40% of your Total Procurement Cost. The other 60% comes down to how you procure product in the first place - your methods of ordering, the way in which you hold stock, your inventory levels, your accounting systems and more.

Looking at it another way, if you buy $40 worth of product, it will cost you $60 to do that. So your Total Procurement Cost is one hundred dollars. This section may be a bit confronting but it is amazing how many organisations make it so difficult to do the job. Again through our activity based analysis we identified incredibly costly processes and duplication of tasks.

To help you better understand the value of simplifying processes let’s imagine Kym, a fictional employee, wants to order toner for the printer. Kym goes to the Office Manager or receptionist or finance team, whoever is in charge of ordering in your business, and says “we need to order toner”. They say “great, fill in this order form, get it signed by the appropriate person” - department head, business owner or Office Manager for example - “and come back to us.” “Then we’ll order it.” By this stage, three people have been involved in ordering toner - Kym, the person responsible for ordering and the manager with that accountability. And yet, no purchase order has even been raised.

Next comes doing just that. Your company will have an internal process for that, it could involve hand writing a purchase order or entering the order into your accounting system to generate a purchase order. But then, that particular supplier may only take orders by phone or fax so you call and ask them to confirm your order by email or fax. Or, you write the order out and fax it to them and so it goes on and on.

Next there’s receiving your orders. How do you do that? Do you receipt them against line items of your purchase order so you can allocate to the requisitioning cost centre or general ledger code? Then you’ve got order returns - what happens when the wrong product is ordered? It has to be sent back and the paperwork tracked backward, credits accounted for etc. And finally, you’ve got the order payment or accounts payable process - do you receive consolidated invoices or separate invoices for each order? And so it goes.

So you can see that based on wages for every person who touches an order from beginning to end and the time it takes them to process that order each step of the way, to lost productivity and more, the process costs can be very high. Those process costs are taken up with the scenario we just described, plus managing multiple vendors, implementing separate order processes for each vendor, managing capital costs and holding inventory, receiving product, distribution to the end user in your business, processing payments, overheads, wastage, obsolescence et cetera.

So what do you do? The tip here is map the current process, understand it and the question it. You must eliminate wasted time and effort.

In our ‘Activity Based Analysis’ we concentrate on order placement, order receipt, order return and order payment. This is a good place for you to start. If you reduce the length and complexity of the process itself - you save.

Also, take a look at the processes for buying simple things like your canteen and janitorial products, like coffee and tissues? People often forget those little purchases like coffee, someone can just pop down to the supermarket with Petty Cash for that. When that happens, you can’t control the spending and petty cash reconciliation is always a time consuming exercise. Once you have the processes in place you can then focus on applying the same systems to core products needed to deliver your business.
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Another way to reduce complexity is to manage the ordering process via an internet ordering platform such as NetXpress.  For example, at Corporate Express our entire catalogue of over 10,000 products is available online via NetXpress. Product details, images, stock availability and pricing are all right there.  Monthly reports capture spend levels by cost centre or department, tracking your budget against actual spend.

In this scenario Kym would simply jump on to NetXpress and raise her order - completed in about 1 minute. That order is then transmitted as an email to her up-line for approval. That email has three buttons at the bottom - accept, reject, log in.  Saving them time as well - they accept it or reject it and the order is placed or not. Instead of taking 20 minutes or half an hour in the previous order process, you take less than a couple of minutes, and there is full visibility of the ordering process.

We know from tracking our results closely for our clients over many years, that our electronic ordering and our electronic consolidated invoice system has been capable of delivering savings of around 20% on process costs.