Get procurement right and you can reduce costs and help secure investment. Nick Wildgoose, supply-chain risk consultant and director of Procurement Advantage, explains.
Startups across the country are trying to rein in spending and reduce risk. While there is no one-size-fits-all solution, procurement is a sure-fire way to stay lean and eliminate needless business expense. Getting it right early on can also help secure investment. So, what can startups do to improve their procurement?
Assess the overall value and cost-effectiveness of suppliers
The first thing to know is that procurement isn’t just about cutting costs, it’s about creating value. Procurement is normally set against the ‘five rights of procurement’:
- The right quality
- The right quantity
- The right price
- The right place
- At the right time
In order to deliver on all five aspects, a startup must understand its own business requirements before signing any third-party contracts with suppliers. It’s imperative to know what you want as a business, so that you can focus your negotiations and reach for the best deal and the best service for your business.
It’s essential to be clear about goals for the short, medium and long term. With these in mind you can categorise suppliers as business critical or important, and focus procurement efforts appropriately.
Getting this right early on also means that startups are more likely to get appropriate service levels from their third-parties. Startup founders that get this wrong will find they spend a lot of time setting up and managing their suppliers, and that can be costly and damaging in its own right.
Make sure the service proposition is fit for purpose
Another thing to consider is whether or not the supplier is able to support changing circumstances and allow your business to be agile. During the current uncertainty, startups may need to resize or pivot to meet customer demand. Procurement contracts need to allow for this flexibility. There is a balance between cost and commitment in most contracts – and now may be the time ensure appropriate supplier capabilities to avoid being locked into agreements that don’t suit your evolving business.
Getting the service proposition right is also important for employees. Not doing so can have a negative effect on their behaviour and lead to what those in procurement call ‘maverick spend’.
For those who haven’t come across the term, maverick spend refers to purchases made outside of agreed contracts. These purchases side-step defined procurement processes and potentially expose startups to higher overall costs, liability risks and other reputational damage.
Poor performance because you have chosen the wrong supplier can also have substantial financial impacts. For example, if your mobile telecoms service supplier is not able to provide you with the right usage information and service. This can have significant consequences in terms of overall employee and business performance.
It’s also important to bear in mind hidden costs when considering procurement. A simple example might be choosing the cheapest coffee beans for your drinks machine. If you have dissatisfied staff who keep leaving the office to buy a decent cup of coffee then you’re looking at false economy.
Consider what is important to your staff when you assess the value of goods and services.
Is the supplier resilient and will it meet your compliance needs?
A final consideration for startups looking to get their procurement in order is the resilience of your supplier and the risk they may pose to your business.
If a startup is overly reliant upon one supplier with limited capacity, any impact on the supplier’s production or significant demand increases will have a knock-on effect. If a supplier has a factory fire, strike, pandemic issue or flood then production will halt, which is why it’s so important to check your supplier’s overall capabilities and business continuity plan.
Startups should also consider the ethical, environmental and corporate social responsibility aspects of a supplier. Look for certifications and policies, including those around modern slavery. Customers are taking increasing interest in the sustainability credentials of businesses, so getting this wrong can quickly damage your reputation, brand equity and the bottom line.
Investors also want to know that suppliers deliver on the ‘five rights’, are resilient, and are adding value rather than creating risks.
Ultimately, in today’s economic environment, improving cashflow has never been more important, and re-evaluating your procurement contracts can help you reduce costs. And the good news is that strong procurement not only improves liquidity, it also creates resilience and can even help build company culture.