How the Right Data Can Improve Aggregation and Negotiation in Procurement

When a board is looking to reduce costs, one of the many departments that it turns to is procurement. As procurement has a direct relationship with many suppliers, it is believed that there will be some way to find stability in a tumultuous time or find new, more efficient ways to source and pay for goods and services, essentially working to cut costs and improve profits.

According to Peter Smith, Chief Research Officer and Managing Director at Spend Matters UK, the next few years will bring a tumultuous time for procurement in the UK and the rest of the world, with multiple factors—the banking crisis in Italy, the threat of IS on supply chains, the US Presidential Election, Brexit, and more—all weighing into the way that global businesses operate.

With all of this uncertainty, preparing for the coming years is atop the list of priorities for procurement, and proactively working with suppliers now could reduce the impact of uncertainty in the future.

Improving Procurement Efficiency in Uncertain Times

Highlighting six strategies needed to improve efficiency and control costs, Smith notes that one of these strategies—aggregation and negotiation—is too often considered a ‘panic button’ approach that executives often request of procurement, resulting in a reactive procurement organization.

“When organizations hit the panic button, often the only one of these that is really addressed is number 4. “Go and tell all our suppliers we want a 5% price reduction” is the cry from the boardroom. Of course that doesn’t work – so it’s much better if procurement can be on the front foot and ready with a coherent approach if it looks like an efficiency or cost reduction program is on the cards.”

Following up the initial article, Smith took a deeper look at ways to improve upon an aggregation and negotiation strategy, noting five key principles to consider:

• Coordinating Purchase Efforts Throughout the Organization: “Look for different parts of the organization buying the same goods or services but doing it individually rather than in a coordinated manner.”
• Understanding Your Spending: “Getting your arms around spend” will always bring benefits. Similar to the first principle, even if you find that a ‘mega contract’ isn’t the best spending option, having a well-informed procurement and spending process is beneficial.
• Consider Collaboration Beyond Your Organization: For smaller organizations, more opportunities to join forces with other companies to improve bargaining power could be a way to drive down costs for you. “Source with Me” or collaborative buying programs have gone beyond simple cost reduction programs, noted by an article in Procurement Leaders.
• Negotiate Better: Ultimatums (“reduce your price 5% or else”) generally leave supplier relationships strained, and are one-sided conversations that will result in a kindly worded “no.” Smith recommends starting the conversation with a supplier with something along the lines of “What can we do to improve value in terms of what we buy from you?” This puts the supplier in a bit more of an open discussion about mutual improvements to a contract.
• Be Aware of Your Contracts: Smith recommends digging into contracts, being vigilant for post-agreement price changes and automatically-accepted price increases.

It Pays to Be Informed

Of the five principles listed above, all of these could be accomplished more easily by using the data that you have in order to improve your bargaining power and by showing suppliers that you bring value to the relationship. However, this is where organizations miss the mark, as disparate systems, paper-based invoices and payments, and error-prone processes stand between you and improved prices from suppliers.

To address this, there are three starting points—gain visibility/embrace analytics, automate in order to eliminate wasteful processes, and pay in a method that benefits both the payer and supplier.

Visibility

One of the first steps to building a platform for negotiating lower rates from suppliers is to improve visibility. Being able to pinpoint exactly the who, what, where, why, and when of spending will help an organization to recognize any inefficiencies in the payment process and recognize opportunities for improvement.

A WEX blog, How Payment Analytics Turn Invoices into Insights, shared how to identify goals, select the right technology, and get the right people in place to use analytics for visibility through payment analytics. Learn even more by reading Unlock a Treasure Trove of Insights in AP Data.

Automation

It’s a sad fact: more than half of companies still make at least 75% of their business-to-business (B2B) payments by paper check. This check process is both error- and fraud-prone, and is cutting into more than your organization’s ability to capture discounts. The move to automate mitigates your risk of fraud, minimizes paper usage, and reduces the prevalence of time-consuming exceptions.

A recent infographic by WEX took a deeper look into increasing visibility and improving relationships with suppliers, all while reducing processing costs, paper usage, and errors through automation of current procurement and accounts payable processes.

Paying in the Most Purchaser- and Supplier-Friendly Way Possible

When negotiating a better rate with suppliers, remember the question, “what can we do to improve value in terms of what we buy from you?” Your suppliers are looking for a purchaser who pays on time (or early), isn’t calling constantly to fix exceptions, and is essentially ‘improving value’ when it comes to the purchaser/supplier relationship.

This is where Virtual Card Numbers (VCNs) have become the most purchaser- and supplier-friendly payment method. VCNs offer improved visibility, easier cross-border payments, faster processing, less waste, and more to both the purchaser and supplier, and helps to answer the “improving value” question while negotiating with suppliers. Learn more in WEX blogs, Five Reasons Your Suppliers Love to Receive Virtual Payments and Five Ways VCNs Ease Cross-Border Payment Pains.