Here on the Source-to-Pay team at Corcentric, a part of the way we identify opportunities for our clients is by analyzing how much they spend annually in a certain discipline or category. Depending on the category, the theory is that there is a certain amount of that annual spend we should be able to influence and by working with our client and their suppliers, create savings for our client’s bottom line. This can be done in a number of ways:
- Engage new prospective suppliers in the market to benchmark current pricing standards across the industry
- Conduct an RFx event allowing both incumbent suppliers and new prospective suppliers a chance to put together a proposal or bring the most current pricing.
- Negotiate contracts with the current suppliers that your client uses.
- Consolidate from many suppliers to a few.
A common mistake in the spend analysis process is to overestimate the cost savings impact within a particular category. Upon a cursory review of spend, certain categories may be targeted strictly because of the volume. However, once you take a deeper dive into the category you can see how simply negotiating a percentage decrease isn’t possible. Fuel is a prime example. Pricing in the fuel industry is volatile, which means a typical RFP process isn’t necessarily going to be effective. Procurement professionals need to get creative.
In a recent engagement with a client, fuel was an area of spend that was targeted. To really achieve savings, we needed a comprehensive approach to cost management. As a third party consultant, we have no ability to impact the actual pricing of fuel, which in this case is direct spend. What we could control was what our customer was getting on the back end of their business, in discounts, rebates, services and incentives from their fuel card management suppliers. The amount that our customer was getting back from these incentives was roughly 3% of their total net spend in the fuel industry.
By engaging the market at large via an RFP, it was clear that the standards in the fuel card management suppliers were long standing and ubiquitous across the market. It became apparent that we were only going to be able to carve out another 1% in savings annually for their bottom line in the form of negotiating discounts, rebates and incentives. Thus we had to get creative in order to create supply chain efficiencies that could drive value other than just true cost savings.
Since we had our customer’s purchase data for an entire fiscal year, we were able to put together an analysis of the sites where their drivers in their network were most frequently fueling up at, and the total spend that our client spent there. From there we worked with the suppliers that we were choosing to move forward with to negotiate further specific discounts at the fuel provider chains that our client’s fleet fueled up at most often. This way, we can create greater supply chain efficiencies and savings by supporting the already existing behavior and tendencies of their operators.
Another focus of our sourcing effort was to increase the intangible services that our client was receiving from their supplier. In this case, we upgraded the service package our supplier was receiving, at no cost to them.
Our solution is projected to increase our client’s annual ROI from 3% to 5% for every dollar spent in the next two years within this product category. The client was happy we were able to revamp their fuel card operations, align them with the best possible suppliers for their supply chain and create a solution that not only catered to how they currently do business but provided room for growth in the future as well.
This example serves as a reminder of why it is important to analyze your supply chain for process efficiencies and cost savings opportunities regularly. There is always room for continuous improvement.
For more on what supply chain consultants at Corcentric can do for you and your company, check out Corcentric.com.