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Significant Cost Reduction Opportunities in Expense Spending
By Robi Bendorf, C.P.M.
With so many organizations searching for ways to reduce costs and increase profits without cutting staff --it’s surprising that more do not look to the area of indirect spending. Savings in this area, also described as expense or MRO (Maintenance Repair Operating) go directly to the bottom line. Yet this area of cost reduction opportunity is frequently overlooked by industry, institutions and service businesses alike. There are numerous reason for this:
- This is an unglamorous area for savings.
- If purchasing savings programs exist they usually focus on high dollar value items used in the products being manufactured.
- Indirect expenses items are frequently not handled by the purchasing department or those trained in purchasing.
- Limited resources are devoted to more immediate needs.
- Indirect is viewed as 100’s or even 1000’s of monthly purchases with values too small to justify careful scrutiny.
- Little or no top management attention is given to this area.
If there is any focus on indirect it is usually to keep it from increasing over the previous year. Rarely does anyone question if the previous year’s amount was too high in the first place.
Opportunities in indirect cost reductions are endless: from light bulbs to janitorial services, from copy paper to travel expenses, from rent to spare parts, from telephone to courier services. If these expenditures have not been looked at carefully, our consulting experience shows that 10% to 25% savings are usually available. Many of these savings are easy to grasp like low hanging fruit. For one recent client, we simply changed the supplier of a packing material to an authorized distributor instead of the past supplier for a savings of 30%. The client was not aware that he had been purchasing from an unauthorized distributor, who in fact was buying from the authorized distributor and then adding his markup to the final price.
Other opportunities may be a little higher in the tree. For example one client was extremely surprised to discover they paid almost 40% higher ticket fares on 133 airline tickets because employees were selecting carrier’s based on employee’s preference rather than lowest fare. This same analysis also showed that 32% in lower fares could have been obtained on 127 trips by using 7 & 14 day advance ticketing. These plus numerous other travel related savings resulted in a total of 12% savings in travel expenses alone. Another twist for a company in a good cash flow position, was to save $132,000 annually by simply training employees who purchased MRO items to insist on a minimum 2% discount for payment of invoices within 10 days.
Savings are also found in areas like advertising, which is usually off limits to even very aggressive cost reductions programs. One study of a multi-product line manufacturer showed 57 different brochure printers were being used. Reducing this number to 10 saved 16% of a $1.4 million expenditure and also provided savings in administrative costs since fewer invoices had to be paid and fewer supplier records maintained.
Even mundane areas such as courier services can generate profits when users are educated in "best practices". One company discovered 23% could be saved by using "Overnight by 3:00 P.M." instead of "Priority Overnight by 10:30 A.M." Many users admitted that, in most cases, the 4-1/2 hours would not matter. This same company expects to save another $11,000 per year by using faxes vs. courier service.
So how does your organization realize these savings? To begin, it’s important to view indirect spending not as fragmented, insignificant purchases charged to various department budgets, but strategicly as annual expenditures by the entire company, grouped into specific categories of goods and services. In this way, $100 per month in office supplies purchased by, the accounting department, to which little attention will be given, becomes $60,000 per year in office supplies for the entire company. This amount of annual volume will be of significant interest to office products suppliers who will be more than willing to give substantial discounts for a annual contract of this or even smaller amounts. You may also want to review the reasons given above for overlooking indirect spending as a profit generating area and see how they relate to your operation. It can also be of great benefit to conduct a training program for non-purchasing personnel involved in indirect spending. In presenting such seminars, I have discovered employees, involved in considerable purchases, who were not even aware that it was important to ask for and expect discounts.
It is also important to give your indirect savings program an on-going emphasis, not a one-shot or program-of- the-month effort. There are so many ways to save money in this area, that year after year motivated and creative people will keep developing new opportunities. The first savings may come from answering the question: "Are we buying things right?", but subsequent and significant savings are also available in determining: "Are we buying the right things?". Rewarding employees for this effort brings long term benefits. But a word of caution is in order: when savings opportunities are discovered, under no circumstances should past practices, or those responsible for them, be condemned in any way. Doing so will cause everyone to focus on defending and perpetuating present procurement practices rather than seeking improvements.
The above examples are just a few of many ways to reduce cost through application of good procurement and organizational practices. By viewing your expense spending as a revenue generating opportunity, today’s enlightened management has another tool to increase profits.