Inept buying that costs millions: Purchase and supply: a survey shows top executives are unaware of the big savings to be made
Sunday 06 March 1994
Every year an estimated pounds 750bn is spent on purchasing and supply. And yet of the 400-plus senior executives questioned in the survey, 17 per cent were ignorant of the percentage of total costs spent on buying in goods and services, and 15 per cent did not know how much was spent on storage and distribution.
The respondents, all managing or finance directors of companies in the private sector with an annual turnover of over pounds lm, were unaware that good purchasing practice can lead to huge savings.
The institute, which promotes best practice in purchasing and supply chain management, says that good techniques can save businesses between 5 per cent and 30 per cent of total costs.
But 22 per cent of those questioned said that there were no savings to be made through improvements in this area, and 36 per cent thought that savings of no more than 4 per cent were feasible.
Peter Thomson, the director general of the institute, said: 'It is truly astonishing because of the sheer ineptitude, the sheer lack of business acumen, it reveals. Not to know how much is spent and how much can be saved says little for them. This survey reinforces what we have found before - that despite high levels of external expenditure, most companies are still in the stone age in their management of the purchasing and supply chain.'
Nevertheless, says Mr Thomson, 'it's astonishing how difficult it is to get the message out to British industry. 'Senior procurement people rarely make it on to the board. They tend to be thought of as functional specialists - and there's very little recognition of the contribution that these people can make if they are properly skilled.'
By addressing the issue of purchase and supply, British Airways, whose suppliers account for 38 per cent of operating costs ( pounds 2bn a year), has knocked pounds 1m off its spending on glasses and 30 per cent off bottled water. The Government says it has saved about pounds 1.7bn in six years on purchasing and supply through the work of the Central Unit on Procurement.
Bankers Trust has saved pounds 12m over the past three years by means of a programme it set up in 1991. The bank recruited a small team of purchasing professionals to review spending in Europe and identify ways of cutting costs without reducing the quality of goods or services. It decided on a policy of selecting fewer, quality suppliers through a process of competitive tendering. So far it has reduced the number of suppliers from 6,000 to 2,000.
Firms that are exclusive suppliers of particular products to the bank often provide a member of staff to work with the bank in areas such as ordering, delivery, storage, administration and payment.
Nissan has set up a supplier development team to oversee three-year programmes, with the aim of helping selected suppliers to become more self-sufficient.
The first stage is a 10-day trial - where one small operation of the supplier is observed - to see if any improvements can be made.
One of Nissan's suppliers, Hertfordshire BTR, of Dunstable, Bedfordshire, a manufacturer of rubber seals and hoses, joined the programme in 1989. In its 10-day exercise, 128 problems were identified. Improvements led to labour savings of 20 per cent, a 70 per cent reduction in work in progress (equivalent to a stock reduction of pounds 70,000), and the freeing of shopfloor space for extra production.
After three visits in a year from a cost-reduction team, Hertfordshire BTR has identified 9 per cent savings on its multi-million-pound sales to Nissan. The company shares those savings with Nissan to an agreed formula.
'What it boils down to is planning. Rather than reacting to events, you drive them,' says Mr Thomson. 'It's also to do with having an intelligent relationship with your suppliers. The old-style buyer might have thought that so long as he got a halfpenny off the gross price he had done a good job, but you need to consider what the lifetime cost will be: getting something at a cheaper price now might mean a reduction in quality. So you need to look at a longer perspective than perhaps was traditional.
'Second, it has become apparent over the past few years that you get more from suppliers if you cultivate them as partners, rather than treating them as opponents.'
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