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Auditel Cost and Purchase Management    TOTAL COST OF PURCHASE®                Looking at business costs from all angles  ...
The Total Cost of Purchase®:                procurement for sustainability                                                ...
“Because it fails to take into account the time and expertise involved in making effective, informed decisions in the proc...
An alternative approach:introducing Auditel’s Total Cost of Purchase model                                                ...
Auditel Cost and Purchase Management     TOTAL COST OF PURCHASE®Our advisory service comes at no cost,and we don’t charge ...
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Total Cost of Purchase

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Auditel provide a free service to health check your business expenditure. The initial investigation is free and you don\'t pay anything up front, just a cut of the savings we are able to make you, once we have made them. Its risk free and all inclusive (we implement the cost savings as well as point them out) so it doesn\'t require any extra time or resource on your part. Contact raymond.jowett@auditel.co.uk for a no obligation meeting or chat.

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Total Cost of Purchase

  1. 1. Auditel Cost and Purchase Management TOTAL COST OF PURCHASE® Looking at business costs from all angles Lowering the cost of doing business
  2. 2. The Total Cost of Purchase®: procurement for sustainability Essential business costs: the traditional approach There are serious flaws in traditional approaches to cost reduction of It is one of the facts of the commercial world that organisations need to spend money to do business. business costs within organisations throughout the UK and Ireland. Premises-related business overheads, fixed and mobile telecommunications, information technology, utilities, waste management and finance such as insurance and bank borrowings are just some of the The Total Cost of Purchase® approach to procurement takes into account a wide essential operational overheads that affect all organisations. array of issues beyond the ‘headline’ cost of the services they rely on and can help organisations of all sizes, across both the public and private sectors, to lower their Without them, no organisation could function. And yet they routinely left in the hands of individuals whose expertise cost of doing business. In addition, adopting the Total Cost of Purchase® model will cost a massive amount of money annually within the UK in fact lies elsewhere within the organisation. In many enable these organisations to minimise their financial exposure to fluctuations in the and Irish economies. Given the vast expenditure involved, smaller to medium-sized businesses, this will be the Office marketplace. organisations need a way of identifying all the potential Manager; in the case of larger organisations, it tends to be service providers in the market and assessing their respective the individual or team responsible for core business-related When applied to business costs and expenditure, the Total Cost of Purchase® model offerings – not only in terms of price, but also in terms of procurement activities. Given that they are ‘procurement both lowers the cost of doing business and also delivers sustainable results. whether they can meet the required levels of service. specialists’, these individuals are routinely tasked with This sustainability comes in two forms. On a purely financial level, it means being the procurement of services that, whilst essential, are not able to make ongoing incremental savings over time, thereby freeing up funds for The in-house dilemma directly related to core business processes, nor their own skill One way to do this, of course, is to hire a full-time in-house further investment in core business activities. And on an ecological level, it means set, nor their own knowledge of each specific market. specialist. But the vast majority of organisations simply using resources efficiently to avoid unnecessary waste and environmental damage. cannot afford to do that. Those organisations that have the The ‘cheap’ option resources to employ their own procurement experts, however, As a result, the vast majority of businesses throughout the UK invariably need to focus on recruiting specialists in their core and Ireland decide to opt for what appears on paper to be the procurement activities. A plastics manufacturing business, for ‘cheapest’ supplier. instance, needs experts in the procurement of raw materials Adopting this purely headline-cost based model may seem“A penny saved is a dollar earned.” Benjamin Franklin and plant specific to its business activities. What this means is that decisions around procurement logical, but it fails to take into account a wide variety of additional factors that contribute to the overall total cost of and cost management for essential business overheads are purchasing essential business products and services. Business costs in the UK and Ireland Fixed telecommunications: £44.6bn (Ofcom 2004) The cost of these key service areas is high today, but it is set to grow even further. The energy, waste and water markets, Gas: £26bn (Auditel estimate April 2006) in particular, continue to face significant pressure in light of Electricity: £17bn (Auditel estimate April 2006) global and domestic factors. This increasing market volatility is IT: £15bn (Computing Marketing Intelligence Nov 2005) adding to organisations’ recognition of the need to work with an experienced, impartial and trusted advisor to reduce their Mobile telecommunications: £12.9bn (Ofcom 2004) financial exposure. Water: £7bn (Auditel estimate April 2006) Similarly, the cost of waste management to businesses in the UK Waste: 1% of GDP per annum £18.5bn and Ireland is set to grow significantly. Research indicates that it (National Statistics, May 2006) will grow from 1% of annual GDP to 1.25% by the year 2012 as European and UK domestic legislation increases the compliance Finance: £100bn plus burden on all enterprises. (Confederation of British Industries) Premises, Facilities Management £105.7bn (MBD Press release March 2006)
  3. 3. “Because it fails to take into account the time and expertise involved in making effective, informed decisions in the procurement Costing the earthand management of essential business services, the traditional approach to service procurement is fundamentally flawed. Soflawed, in fact, that it results in businesses throughout the UK and Ireland spending more on their essential business services than As well as having to take into account the complexity of utilities, IT, telecommunications, premises andthey need to.” Chris Allison, Managing Director of Auditel. finance expenditure, organisations are also facing a new and hitherto underestimated essential business cost: waste and environmental compliance management.A flawed model Environmental change remains high on the legislative priority the issues involved in waste compliance and the legislative list, and the European Commission continues to implement framework that surrounds it. Outsourcing this responsibility toAgainst this backdrop, it is not surprising that reducing operational overheads is more critical to a wide variety of new directives to enforce more ecologically a specialist enables them to do two key things. Firstly, they gainbusiness than ever. This is not only because the vast majority of essential business services are becoming sound business practices. Such legislation has historically had peace of mind knowing they will not incur any stiff penaltiesmore expensive, however; it is also because organisations increasingly recognise just how valuable it is its biggest impact in the world of manufacturing, but this is no for non-compliance. And secondly, they can significantlyto make savings. longer the case. reduce the associated ongoing cost of compliance, as well as the cost of developing the in-house ability themselves.Consider, for instance, a company with a gross profit margin of 25 per cent making savings of 5% on In this area organisations are becoming more reliant ontheir business costs and increasing profits to 30%. To achieve that figure through day-to-day operations, external agencies with a thorough working knowledge ofthat company would have to generate an additional 20% in sales.Utilities privatisation FinanceEver since utilities were privatised, the offerings of potential suppliers Finance, too, is a highly mature and sophisticated marketplace, Other considerationsof energy have remained convoluted and confusing. Even now, each presenting organisations with a greater number and wider varietyservice provider has an ever-growing list of offerings – and many have of financing options than ever before in key business areas such asbranched out from their core activities to provide an ever increasing commercial insurance, lending, employee benefits and leasing. When it comes to waste and environmental compliance, thererange of services. As a result, it is more difficult than ever before to are a number of other factors organisations need to bear in mind. True cost of purchasing servicescompare different suppliers on a ‘like-for-like’ basis without expert Continuing to do business in a ‘throwaway’ society is not just Those organisations that task key individuals with such decisions areinsider knowledge. irresponsible and unsustainable – it is also bad for business. Shifting incurring even greater cost, as taking someone away from their core to a thrift culture makes sense.Communications and IT competency translates directly into reduced efficiency in their mainThe Communications and IT market is similarly characterised by an area of responsibility. In addition (and all too easily overlooked) is the • Being able to demonstrate ethical purchasing practices is becoming increasinglyever-growing sophistication and complexity. Today’s rate of progress material cost of making these decisions: every worker comes with a important, both to customers and shareholders.means new technologies are arriving with growing rapidity. Alongside salary and a desk cost to the business. This translates into an hourly rate, • Natural resources are not infinite, and yet energy management alone willthe complexities of communications and IT, people are confronted and it is essential for organisations to calculate this expenditure into not solve the problem: organisations need to think now about ensuring theirwith more and more complex and sophisticated marketing, which their Total Cost of Purchase® when it comes to calculating how much it investments help develop viable alternatives.makes the decision-making process all the more confusing. actually costs them to make savings. Many organisations underestimate the time it takes to acquire the knowledge needed to become a • As the legislative environment tightens to enshrine environmentally soundSuccessfully evaluating such technologies depends on a highly business practices in law, choosing not to do business in an ecologically sound competent cost and purchase management specialist and to keep up tosophisticated level of understanding and current worker intelligence. manner is becoming the expensive option. date with ever-changing markets and services.To make the right decision, organisations need to be able to assess thepotential benefits of the technology in terms of cost; they also need Outsourcingto have a detailed understanding of how the technology could impact This is why more and more organisations are turning to outsourcedexisting business processes. providers of cost and purchase management services. By doing so, they can access specialist insider knowledge of the respectiveOther business costs markets, eliminate the financial loss to the organisation of taking keyThe Total Cost of Purchase® is of course equally applicable to all individuals away from their core responsibilities, and take advantagebusiness expenditure. For more information and a list of the business of a methodical and thorough analysis of their expenditure, withoutcosts we cover, see the Business Cost Areas section. incurring any upfront costs.The overall market in essential business services is characterised by an ever-increasing complexity. As a result, gaining thecomprehensive level of understanding of each market that is required to make the right business decisions is well beyond the expertiseof the majority of individuals charged with making purchasing decisions.
  4. 4. An alternative approach:introducing Auditel’s Total Cost of Purchase model Auditel’s Total Cost of Purchase model in actionTo embrace a holistic approach to procurement and cost management means adopting the Total Cost of Haberdashers’ Monmouth School for Girls The Children’s TrustPurchase® model to business costs. By working with a trusted adviser across each of the key business costs thatrepresent ongoing and significant operational overheads, organisations can manage their costs and reduce the Haberdashers’ Monmouth School for The Children’s Trust is a nationalamount of financial and material waste to which they are currently exposing themselves – as well, of course, Girls is part of a family of five schools charity providing care, education,as the associated monetary risk. across three sites in Monmouth, therapy and rehabilitation to providing education for boys and girls children with multiple disabilities,Implementing the Total Cost of Purchase model from three to 18. complex health needsAuditel’s Total Cost of Purchase® model is a holistic approach to the procurement of essential business Auditel’s analysis has already saved 22% on utilities “Our Auditel experience has been very positive. We’reservices, and it involves a rigorous analysis of a number of key business costs. costs for Haberdashers’ Monmouth School for Girls by very pleased with the savings they have found us as ensuring they are on the most appropriate contracts• Assessing the status and cost of existing services • Identifying and claiming rebates this is money we can put to much better use looking and tariffs. Going forward, Auditel have been invited to Lowering the Total Cost of Purchase® begins with identifying the Once billing and service anomalies have been identified, after the children who depend on our services.” review additional categories, including Stationery and needs and requirements of your organisation, and fully engaging organisations are in a position to claim rebates on any services IT consumables as well as Janitorial Supplies. – Simon Browning, Director of Finance and Company with the overall business strategy. for which they have been over-charged and evaluate existing Service Level Agreements. Secretary, The Children’s Trust In order to make savings, organisations need to identify precisely where they are spending money at the moment. Crucially, however, Savings breakdown: • Reducing future essential business costs Despite The Children’s Trust running a pretty tight ship, they also need to assess whether the services they currently pay for Other elements that need to be considered at this stage include: Category % Saving Auditel’s expertise and buying power were still able are strictly necessary to their business. • Future savings opportunities Electricity 15% savings in a number of key to negotiate signinficant• Retrospective audit to assess historical accuracy • Any remaining over-specification of services business cost areas such as electricity, telecoms and • Strategic investment in assets that depreciate more slowly Gas 16% Any thorough analysis of expenditure on essential business costs stationery, as well as providing evidence-based advice involves a detailed examination of previous billing history to • More efficient methods of alternative funding Landline and Mobile on their water consumption and introduce energy identify areas of over-charging. • Process efficiency, conservation and environmental issues Communications 22% saving measures for the Trust. A detailed sign-off procedure to ensure a comprehensive audit trail is left to ensure there is a clear understanding of projected savings for subsequent evaluation. Savings breakdown: “I’ve had a lot of direct contact with the Auditel team • Implementing Recommendations Category % Saving over the past year and am very pleased with the Once the initial savings have been made, organisations need to Telecoms 24% service they’ve provided. Everybody we deal with is transfer their service contracts to the identified supplier of choice. Electricity 43% very professional and a delight to work with.” • Ongoing monitoring to ensure value is maintained Stationery 13% – Chris Jones, School’s Finance and Administration Manager The market is constantly changing. The best deal for an organisation Energy efficiency measures 14% today may not be the most appropriate tomorrow. For this reason, it is essential that organisations retain a ‘watching brief’ over their business costs. Sustainable benefit can only be achieved if organisations undergo a regular monthly review of each of their essential business services, Conclusion with a keen eye on market developments. This is especially true in heavily regulated sectors such as telecommunications, energy and Auditel’s Total Cost of Purchase® model is a holistic way of reducing and managing the cost of doing business for your waste management, where updates to existing legislation can have organisation. By evaluating not just the price of those services, but every aspect of the procurement lifecycle, the Total a radical impact on businesses overnight. Cost of Purchase® model enables organisations to lower their business costs year-in and year-out. The ‘watching brief’ also entails ongoing monitoring to This unique approach to cost and purchase management allows organisations to reduce their overall operational ensure mis-billings are identified straight away, evaluating the changing requirements of an organisation and expenditure to a significantly greater extent than merely selecting the supplier with the lowest ‘headline’ cost. monitoring markets to maximise ongoing benefits.
  5. 5. Auditel Cost and Purchase Management TOTAL COST OF PURCHASE®Our advisory service comes at no cost,and we don’t charge a penny until yousee real, quantifiable savings.Contact us now to find out how ourTotal Cost of Purchase® model couldbenefit you. Contact Details: www.auditel.co.uk www.auditel.ie

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