^{_{[The risk of running too lean]}}

Many see procurement as a mere cost center. No real revenue generated, only ‘cost avoided’.

So I decided to run an experiment:

What is the risk of a procurement department that’s too lean?

We are going to make some assumptions and then look at the impact.

Let’s dive right in.

Situation

Let’s compare two procurement departments, one before a headcount reduction and one after.

Before:

Number of procurement reps: 10

Annual spend: $1,000,000,000

Amount of bid processes/year: 50

Average savings: 8%

Total savings: $80,000,000

Cost/rep: $130,000

Total: 1,300,000

After:

Number of procurement reps: 8

Annual spend: $1,000,000,000

Amount of bid processes/year: 50

Average savings: 7%

Savings: $70,000,000

Cost/rep: $130,000

Total cost of reps: 1,040,000

Here are some additional assumptions:

One procurement rep should only work on a max of three bids at any point in time, otherwise they start making mistakes.

Mistakes can mean: increased risk (liability, decreased savings due to fewer and less diligent negotiation rounds as described above).

Result

As we can see, the cost of your procurement department goes down by $260,000 (from $1,300,000 to $1,040,000).

Which is a remarkable drop.

But let’s look at how much less money is saved:

Savings/year drop by $10,000,000 (from $80,000,000 to $70,000,000).

In very simple terms this means that $260,000 in headcount savings translates to $10,000,000 in increased costs.

A net - $9,740,000.

And I haven’t even quantified the additional risks implied by an increased workload on each rep. These usually include liability, operational and contract risks that will cost you additional money (and lost customers down the line).

Or just very simply overseeing a supplier, that would have saved money and over performed.

What about doing this instead?

Maybe, instead of cutting heads in procurement, remember that every $ saved goes directly into profit.

1:1.

Before cutting heads, build a strategic business plan with your team, so that they focus on the 20% of projects that generate 80% of the savings.

You will soon find out that your reps will pay for themselves 10 times over.

Let’s remember:

Procurement might be a cost center.

But the money you’ll save is worth the investment.

Until next time,

Gereon

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