Inflation fears and budget cuts should not hurt e-procurement reverse auction efforts.

July 9th, 2008

In fact

In fact, there has never been a better time to save money. Suppliers that are hurting want your business and incumbent suppliers don’t want to lose your business. What a great time to have suppliers compete for your business?

There could not be a better environment for using reverse auctions and other hosted spend management tools. And, when you are using a full service hosted tool, your valuable resources and associates are free to tackle other issues. This really is a common sense approach. If during hard economic times, you were to put more of your spend under the management of these types of tools, your customers just might thank you with more loyalty in the way of increased wallet share. It’s time for protective buyers to look for alternative sources of supply and place a larger percentage of spend under management.This is an area in which Retail lags all industries.

In a study released during May by the Aberdeen Group titled Strategic Sourcing in EMEA, the study revealed that top-performing enterprises utilize e-sourcing solutions for a remarkable 56% of their addressable spend. This study included an evaluation of an astonishing 230 EMEA based sourcing programs. In addition, the best in class organizations realized cost savings 40% higher than all other organizations.

It is time to look at how we do things and make some needed changes. If a super market company’s total cost of goods were 72% of revenue, and supermarket net profitability averaged 1%. What type of net profit improvement might we anticipate if a $500M supermarket retailer were to assign just 10% of their total spend to these types of tools? The math is pretty simple. Existing net profit at 1% would equal $5M. Present cost of goods at 72% would equal $360M. If 10% of total spend were assigned which is $36M to these tools and savings averaged only 10%, this retailer would reduce cost of goods by $3.6M or an astonishing improvement in net profit of 72%. Theoretically these savings should drop straight to the bottom line minus certain switching costs associated with new suppliers and savings timing based on actual delivery timeframes.

The cost of these types of tools, are so minimal in a hosted environment that they almost do not impact the financial example listed above. Remember in the Aberdeen report, best practices companies assigned 56% of available spend. Their models may differ based on Industry. What are we waiting for?

I look forward to your comments.

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