Generally speaking in order to increase revenue companies look to either increase sales or reduce costs without impacting current service levels or quality. One of these is significantly harder to do than the other. You guessed it, increasing profit. Assuming a 5%-10% profit margin in order to net an extra $100,000 your sales would have to increase by $1 - $2 million. This is why many companies choose to look the other direction and turn to industry specialists in strategic sourcing and cost reduction, bringing in an outside consulting firm such as Source One Management Services. Savings can be found in a number of categories including but not limited to telecommunications, IT, benifits and insurance, freight and logistics, waste removal, MRO, office supplies, utilities and professional services. Anything under your current spend umbrella equates to potential savings opportunity.

Since many of these companies are undergoing a cost reduction initiative you may ask, why would you spend money on bringing in an outside consulting firm if you are already struggling financially? This is the primary reason why companies like Source One have developed a fee based contingency model. Meaning you will be charged for only a percentage of the overall hard dollar savings as they are realized. This means you don't have to spend any money up front or for that matter any additional money whatsoever. Essentially, you will be sharing savings with the company that helped you realize them, rather than paying upfront. This alleviates a lot of the pressure of bringing in a consulting firm and having to pay an initial fixed fee or a fee based off an hourly rate.

One thing to be mindful of prior to initiating a sourcing initiative is to ensure that all current contracts have expired or are expiring in the upcoming year. Some common contract terms favorable to the suppliers to be wary of are listed below.

Auto-renew clauses: A large number of contracts have an initial term covered within the Agreement. However, after the initial term expires a clause defined within the contract allows the contract to be renewed if it is not canceled or extended within a certain timeframe. These clauses can be fairly detrimental if they are not caught early enough. For example, you may have a two year contract with a supplier that has an auto-renew clause within it that extends the contract for another two years without being renegotiated, given a two month period prior to renewal. Now you're stuck with that supplier whether you like it or not for another two years, and if it is not caught the next time this issue can be on-going and severally impact your negotiating power.

Volume Commitment: Many suppliers have what is called a volume commitment in order to keep prices at the negotiated levels. The issue here is to make sure that the volume you are committing to is an easily reachable and obtainable goal. If it is set to high and you do no reach your commitment now your prices are going to be reset by the supplier at a premium level of their choosing. In this case, you lose almost all negotiating power and have placed your pricing primarly in the hands of the supplier.

Pricing that is set to Expire Prior to the Contract: This is a situation in which suppliers offer very low and favorable pricing upfront; however, it is not for the full length of the Agreement. Although you are realizing immediate cost savings, on the backend you are going to get hit with pricing that is most likely close to retail cost, diminishing all savings realized during the initial stages.

Not only do strategic sourcing firms help to reduce costs, they ensure that contracts are properly negotiated and that the terms are fair to both parties. This keeps a good working relationship between you and the supplier, and more importantly makes sure that you are realizing savings through the lifetime of the Agreement.
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Mike Croasdale

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