This document discusses common failings that lead businesses to pay too much for overhead expenses. It identifies ten key reasons for excessive overhead costs: lack of effective policies, contracts, reviews, specifications, procurement standards, processes, and supplier management as well as issues with staff and management behavior. The document advocates developing clear policies, contracts, and reviews for expense categories and suppliers. It also recommends tools for tender management, contract management, and seeking external expertise to improve procurement practices and reduce overhead costs.

1. Why are you paying too much for overhead expenses? Active Cost Management 2009

2. TIMES ARE GETTING A LOT TOUGHER

3. Businesses need to find every penny of savings to survive

4. No management can ignore the importance of cost management. In fact, management is an important part of the answer.

5. Overhead expenses have often been overlooked, because they were considered too small to be important

6. But now every drop counts

7. Examples of Overheads (Only external purchases)

8. Ten Reasons You Pay Too Much Policy Contracts Reviews Specifications Procurement Standards Procurement Processes Supplier Push-Back Supplier Management Staff Behavior Management Behavior

9. Policy - Common Failings

10. No policy developed for procurement overall

11. Travel policy? Couriers? No policies developed for individual expense categories Electricity Supply? Freight Deliveries – Outward? Office Supplies? Mobile Usage?

12. See our website for more information on ‘What You Need in an effective Cost Management Policy’ www.activecost.com.au

13. Contracts - Common Failings

14. No contract in place Inadequate contract Contract lost Contract in place, but terms are unclear to stakeholders Contract not enforced Expired contract

15. Why No Review?

16. No strategic direction

17. No benchmarks

18. No Service Level Agreement

19. No Key Performance Indicators

20. No Supplier Meetings To Discuss Service Level Agreement

21. No Reporting

22. Specification

23. No effective communication between procurement and R & D in design phase

24. Wrong technology chosen - not aware of changes

25. Oversize orders

26. Product requires greater inventory control

27. Unrealistic delivery requirements Unrealistic delivery times

28. Over or underestimating demand

29. Poor understanding of intended final use of product/ service

30. Lack of knowledge of expense category and current trends.

31. Wrong choice of ordering channels

32. Wrong choice of delivery options

33. Inappropriaterisk aversion

34. Lack of knowledge of supplier’s industry

35. Poor procurement standards

36. Lack of policies

37. Lack of management interest

38. Low level of procurement skills or experience

39. Lack of industry contacts

40. Poor or ad-hoc reporting

41. Under resourcing

42. Lack of KPI’s

43. Lack of benchmarks

44. Poor accountability to stakeholders and internal customers (Duck for cover)

45. Lack of the required detailed knowledge of each overhead cost category

46. Procurement processes

47. Needs analysis

48. Market analysis

49. Rfxdocumentation

50. Evaluation of prospective suppliers

51. Bias in supplier relationships may occur because staff want to favour family members or friends

52. or in a few cases, they may even be on the fiddle

53. or frustrated in their work by internal politics

54. Inconsistencies in procurement can arise due to decentralised procurement centres, and duplication of activity

55. Evaluation problems

56. Implementation problems

57. Supplier push-back

58. Naturally, suppliers will try to change the rules

59. They may change the product or service

60. Change the backup or service level

61. Change the data

62. Or change their costs by redefining the product from this … to this

63. They may push ‘off contract’ items, so they are not price controlled

64. But most will try to change the game

65. Supplier Management

66. Your business is a complex machine - and suppliers form a key part of it.

67. Partners respond if the incentives are right.

68. You need to devote adequate resources to managing suppliers

69. Make sure you have the right machinery in place to manage suppliers

70. There have to be realistic sanctions if suppliers fail to respond. This is where Contract Management software can be important.

71. Staff Behaviour Staff can drive additional cost through their behavior.

72. Rogue purchasing Unbudgeted purchasing

73. Over ordering Poor monitoring of ‘use by’ dates

74. Not communicating supplier failings

75. Expense Account Purchases

76. Management Behaviour Many times management behavior, or lack of action, will be the cause of unnecessary or overpriced purchases. This is due to …

77. Not communicating procurement's role in strategy

78. Not producing policies Under resourcing procurement Letting supplier management meetings lapse Allowing stakeholder satisfaction reviews to lapse Not monitoring SLA’s and KPI’s

79. Authorising unchecked accounts Authorising rogue purchases Authorising expense account purchases

80. Not monitoring purchases against budgets

81. Not demanding suppliers perform to their contracted performance levels

82. Remember, there is a time when the wisest course is to call for external help

83. Strategies

89. Tools Use Tender Management tools for RFx (Request for Tender, Request for Price, Request for Information , Expression of Interest) - improve productivity and reduce risk. Use Contract Management tools for Supplier Management Use external experts for low strategic value but high complexity procurement

90. For information on tender management and contract management tools, or for external support for better procurement, contact 1300 8600 63 Or go to our website at www.activecost.com.au Sydney Richard Pitchforth, ph +64 (0) (413) 285 745 Brisbane Peter Trandafilovic ph +64 (0) (414) 778 840 Pictures thanks to www.sxc.hu