Are Your Teabags the Tip of the Iceberg?
“I know what I spend, I just don’t know what I buy” David Bullock, COINS P2P and Supply Chain Expert discusses the importance of controlling rogue spend using specialist construction software solutions.
This single sentence stopped me dead in my tracks this week, as its probably the simplest, most apt sentence to describe many businesses view on construction procure to pay these days
Over the last few months I have spoken with countless construction contractors who all repeat a similar mantra. It has now become commonplace for there to be a disconnect between the efforts and hard work put in by construction supply chain managers and procurement teams in establishing and managing relationships with key suppliers and the actual procurement that goes on onsite. Those hard-earned negotiated prices and contracts get bypassed in an instant, usually because of the lack of joined-up processes and thinking. Supplier relationships are left teetering on the precipice due to an incorrect buying process leading to confusion and a ‘bad taste’.
I am not going to point any fingers here as in some ways everyone in culpable. Supply Chain Managers, Procurement staff, Estimators, QS’s, Site staff all have their own views as to what is needed and when, and importantly by whom!
Have you ever considered the impact to your ongoing costs of rogue spend alone? What do we mean by rogue spend? Just think of all those items that have been purchased either on site, or through a buyer, which should really have gone through a nominated supplier, but for ease, speed or just plain laziness, they were bought elsewhere. Once ordered and delivered it was too late to do anything about it and the additional cost was absorbed by the project. All those £’s add up on each project, and if you are running many disparate projects it’s easy to see how it can start to really snowball across the business.
So, consider the humble teabag. I recently spoke with one of our customers who we were doing some work on construction procurement and category management and through assessing data collected and analysed using COINS software they were able to draw out some amazing things. Firstly, how much tea they actually drink? Secondly, and more worrying, was the fact that they were, in some cases, spending 46% more for their teabags in some regions than others (for those interested in the numbers we found that in some regions of the business they were spending £17.70 for 1100 bags of a well known brand, yet in other regions they were paying a staggering £25.86 for the exact same bags) When added up, this equated to a staggering amount in additional spend. I have to say we were all staggered by this and it then begged the question, what else are we spending money on? How many safety boots do we actually get through per year etc? It may have opened a can of worms but one that desperately needed opening and dealing with. COINS dug a little deeper and investigated a common type of insulation board and found again in some cases they were paying 27% more (again the numbers are incredible, they were paying £5.75, £6.40 and £7.32 per square metre for the same product).
Why exactly does this happen? Here are some of the main reasons why some construction spend goes un-managed, and if left un-checked will just get worse.
- No formalised process is in place for all the smaller/low value transactions
- Existing process is too cumbersome/complex/non existent
- People believe that their purchase are too small to really impact the bottom line
- The business and management focus on large spend, big ticket items often forgetting that all the small things really do add up!
- Management acknowledge that a percentage of this type of spend is inevitable and un-manageable not realising that leaving unchecked it will only worsen
- Corporate, Strategic deals with your suppliers often lose sight of some of the small items
- Overlapping contracts with suppliers causes confusion and leads to purchases with sometimes non-preferred suppliers, which in turn can leave the business at risk due to non-compliance
- Too many vendors to manage can lead to no formalised approach as no one has time to do the job properly
So, just think, for every £1M of spend on a project with a very modest 5% rogue spend this could equate to £50k in potential cost savings. It’s a no brainer! So, what’s your rogue spend? How can we do something about it using software solutions?
In order to break this cycle we need to be stronger and think more strategically.
You must let your business know the correct methods of procurement. Have rules in place to stop this spend, remove the ability for rogue spending to take place. If you have spent time and energy putting together framework/negotiated agreements with your supply chain then ensure that these are adhered to. Communicate regularly with your construction supply chain partners to ensure that you have the latest information, are there any new price lists, changes to items etc. Communication is key both into your business and with your wider supply chain. Good communication will ensure no surprises further down the line.
High volume of low value transactions? Look into the use of Purchase Cards (P-Cards) to manage purchases below a certain threshold. These items can be simply tracked and trended for future category management decisions. Use of P-Cards will significantly reduce the burden on procurement yet still provide simple and accurate visibility of spend and trends.
Unmanaged purchases? Consider the use of eCatalogues so that your employees can make low value purchases simply and easily via an online catalogue with your preferred suppliers. Over time regular purchased items can be identified and added to the catalogue making them dynamic and adhering to the correct procurement practices.
Make a commitment to your business and your supply chain that you are going to implement a robust procure to pay strategy. Why should you do this? Simple, it shows to your suppliers that you mean business, it provides them with reassurance that you want to work with them long term. If you think about it from their side for a moment. Your supply chain can potentially work with you and of course any of your competitors. What you need to do is create a climate and process which makes doing business with you easy, stress-free, non-confrontational all the time reducing theirs (and your) risks. In doing so you will bring your supply chain closer to you, creating a bond of trust as working with anyone else is seen as “hard work”. Get this right and you will have a supply chain pulling in the same direction, providing you with first class service and support. Why? Because they know they are valued by your organisation.
So, fancy that brew now?
To find out more about how your business can control rogue spend using COINS construction software solutions, get in touch here.
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