Procurement must contribute more to the overall competitiveness
Chronicle March 8, 2019 · By Lars Lange Andersen, Head of Food & Beverage, Solar A/S
The latest financial statements of several Scandinavian food businesses tell the same tale of an industry under pressure. While the Confederation of Danish Industry (DI) is working on “improving Denmark’s competitiveness in the food and beverage industry”, it’s clear that the industry is challenged by high costs.
In a 2018 survey conducted by DI, the food and beverage companies identify costs as the biggest obstacle for growth. Ingredients, rent and salaries are difficult to do something about without it having noticeable consequences. Therefore, we need to look elsewhere in order to find some extra value for the bottom line.
And this is where procurement comes into play.
Recently, I visited a company. Here, they may well have gained a competitive agreement on a range of products but often they ended up losing their savings in billing and warehouse costs. We see major successful businesses buying the same way that they’ve always done. I don’t doubt that people are working really hard. But I believe that while you focus on purchase costs, at the same time, you should ask yourself; Can we address this task in a fundamentally different way?
Purchase costs only make up 15%
In the food industry magazine Plus Proces, Force Technology has previously pointed out that the purchase cost of equipment only makes up 15 to 20% of the total costs. The rest is operations. I don’t agree with that estimate. Not at all.
At Solar, we’re sourcing for all parts of the Scandinavian food industry. That’s why we know that more companies are starting to implement smarter warehouse solutions, consolidate their suppliers and find the right logistic setup.
And it works. Our customers tell us that typically they reduce net working capital with up to 12%. Administration regarding ordering is reduced with up to 30% and their general consumption is reduced with up to 15%. In all, this may add up to 25% extra value which will either improve the bottom line or free up working hours that then in turn contribute with real value instead of administration.
But where to begin?
Of course it depends on maturity. Do you really see the big picture?
Some companies struggle to achieve transparency in their total cost of ownership, TCO, and therefore narrow their sourcing focus to the purchase price alone. Here, a couple of easy steps such as simple warehouse solutions and digital ordering services may generate some quick results and make way for even bigger winnings.
Others are in full control. They know their TCO and are strategic in their sourcing setup. So they are skilled at buying in a way that takes into account all costs in connection with purchase, consumption and disposal of materials. Here, it’s possible to implement more comprehensive solutions like standardisations, tail spend consolidation and KPI reporting.
In the end, it all comes down to how far you’re willing to go. It can be a challenge to move in a new direction and it requires the support of the organisation. But if you dare to go all the way, you can become a pivotal part of the total competitiveness of the company, improve the bottom line and not least, take off some of the pressure on the business.
Want to know more about TCO?
With a TCO approach and a strong partnership we can find that extra value in your sourcing setup together.