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Why You Pay Too Much

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Find out why your business may be spending too much, and where to look for savings.

Published in: Business, Technology
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Why You Pay Too Much

  1. 1. Why are you paying too much for overhead expenses?<br />Active Cost Management 2009<br />
  2. 2. TIMES ARE GETTING A LOT TOUGHER<br />
  3. 3. Businesses need to find every penny of savings to survive<br />
  4. 4. No management can ignore the importance of cost management.<br />In fact, management is an important part of the answer.<br />
  5. 5. Overhead expenses have often been overlooked, because <br />they were considered too small to be important<br />
  6. 6. But now every drop counts<br />
  7. 7. Examples of Overheads<br />(Only external purchases) <br />
  8. 8. Ten Reasons You Pay Too Much<br />Policy<br />Contracts<br />Reviews<br />Specifications<br />Procurement Standards<br />Procurement Processes<br />Supplier Push-Back<br />Supplier Management<br />Staff Behavior<br />Management Behavior<br />
  9. 9. Policy - Common Failings<br />
  10. 10. No policy developed for procurement overall<br />
  11. 11. Travel policy?<br />Couriers?<br />No policies developed for individual expense categories<br />Electricity Supply?<br />Freight Deliveries – Outward?<br />Office Supplies?<br />Mobile Usage?<br />
  12. 12. See our website <br />for more information <br />on ‘What You <br />Need in an effective <br />Cost Management <br />Policy’<br />www.activecost.com.au<br />
  13. 13. Contracts - Common Failings<br />
  14. 14. No contract in place<br /> Inadequate contract<br />Contract lost<br /> Contract in place, but <br /> terms are unclear to <br /> stakeholders<br /> Contract not enforced<br />Expired contract<br />
  15. 15. Why No Review?<br />
  16. 16. No strategic direction<br />
  17. 17. No benchmarks<br />
  18. 18. No Service Level Agreement<br />
  19. 19. No Key Performance Indicators<br />
  20. 20. No Supplier Meetings<br />To Discuss Service Level Agreement <br />
  21. 21. No Reporting<br />
  22. 22. Specification<br />
  23. 23. No effective communication between <br />procurement and R & D in design phase<br />
  24. 24. Wrong technology chosen - not aware of changes<br />
  25. 25. Oversize orders<br />
  26. 26. Product requires greater inventory control<br />
  27. 27. Unrealistic delivery requirements<br />Unrealistic delivery times<br />
  28. 28. Over or underestimating demand<br />
  29. 29. Poor understanding of intended final use of product/ service <br />
  30. 30. Lack of knowledge of expense category and current trends.<br />
  31. 31. Wrong choice of ordering channels<br />
  32. 32. Wrong choice of delivery options<br />
  33. 33. Inappropriaterisk aversion<br />
  34. 34. Lack of knowledge of supplier’s industry<br />
  35. 35. Poor procurement standards<br />
  36. 36. Lack of policies<br />
  37. 37. Lack of management interest<br />
  38. 38. Low level of procurement skills <br />or experience<br />
  39. 39. Lack of industry contacts<br />
  40. 40. Poor or ad-hoc reporting<br />
  41. 41. Under resourcing<br />
  42. 42. Lack of KPI’s<br />
  43. 43. Lack of benchmarks<br />
  44. 44. Poor accountability to stakeholders and internal customers<br />(Duck for cover)<br />
  45. 45. Lack of the required detailed knowledge of each overhead cost category <br />
  46. 46. Procurement processes<br />
  47. 47. Needs analysis<br />
  48. 48. Market analysis<br />
  49. 49. Rfxdocumentation<br />
  50. 50. Evaluation of prospective suppliers<br />
  51. 51. Bias in supplier relationships may<br /> occur because staff want to<br />favour family members<br />or friends<br />
  52. 52. or in a few cases, they may <br />even be on the fiddle<br />
  53. 53. or frustrated in their <br />work by internal politics<br />
  54. 54. Inconsistencies in procurement can arise due to decentralised procurement centres, and duplication of activity<br />
  55. 55. Evaluation problems<br />
  56. 56. Implementation problems<br />
  57. 57. Supplier push-back<br />
  58. 58. Naturally, suppliers will try to change the rules<br />
  59. 59. They may change the product or service<br />
  60. 60. Change the backup or service level<br />
  61. 61. Change the data<br />
  62. 62. Or change their costs by redefining the product from this …<br />to this<br />
  63. 63. They may push ‘off contract’ items, so they are not price controlled<br />
  64. 64. But most will try to change the game<br />
  65. 65. Supplier Management<br />
  66. 66. Your business is a complex machine - and suppliers form a key part of it.<br />
  67. 67. Partners respond if the incentives are right. <br />
  68. 68. You need to devote adequate resources to managing suppliers<br />
  69. 69. Make sure you have the right machinery in place to manage suppliers<br />
  70. 70. There have to be realistic sanctions if suppliers fail to respond.<br />This is where Contract Management software can be important.<br />
  71. 71. Staff Behaviour<br />Staff can drive additional cost through their behavior.<br />
  72. 72. Rogue purchasing<br />Unbudgeted purchasing<br />
  73. 73. Over ordering<br />Poor monitoring of ‘use by’ dates<br />
  74. 74. Not communicating supplier failings<br />
  75. 75. Expense Account Purchases<br />
  76. 76. Management Behaviour<br />Many times management behavior, or lack of action, will be the cause of unnecessary or overpriced purchases. This is due to …<br />
  77. 77. Not communicating procurement&apos;s role in strategy<br />
  78. 78. Not producing policies<br />Under resourcing procurement<br />Letting supplier management meetings lapse<br />Allowing stakeholder satisfaction reviews to lapse <br />Not monitoring SLA’s and KPI’s<br />
  79. 79. Authorising unchecked accounts<br />Authorising rogue purchases<br />Authorising expense account purchases<br />
  80. 80. Not monitoring purchases against budgets<br />
  81. 81. Not demanding suppliers perform to <br />their contracted performance levels<br />
  82. 82. Remember, there is a time when the<br />wisest course is to call for external help<br />
  83. 83. Strategies<br />
  84. 84.
  85. 85.
  86. 86.
  87. 87.
  88. 88.
  89. 89. Tools<br />Use Tender Management tools for RFx<br /> (Request for Tender, Request for Price, <br /> Request for Information , Expression of Interest) - <br /> improve productivity and reduce risk.<br />Use Contract Management tools for Supplier Management<br />Use external experts for low strategic value but high complexity procurement <br />
  90. 90. For information on tender management and contract management tools, or for external support for better procurement, contact <br />1300 8600 63<br />Or go to our website at www.activecost.com.au<br />Sydney Richard Pitchforth, ph +64 (0) (413) 285 745<br />Brisbane Peter Trandafilovic ph +64 (0) (414) 778 840<br />Pictures thanks to www.sxc.hu<br />

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