This question vexes all retailers and most e-procurement providers tell them to run the same events again which misses the point as well as potentially the largest retailer opportunity.
Retailers ask me all the time where to begin with their reverse auctions. It might surprise you that I tell them not to necessarily place all of their focus on the expense or indirect categories by default. The fact of the matter is that for most retail companies their largest area of expense is their cost of goods. In most cases this is going to be somewhere between 65% to 75% of total revenue depending on the industry vertical. By default the gross margin line is going to be somewhere between 25% and 35%. The expense categories also contains salary and benefits which makes the spend for indirect categories actually smaller than the number represented by a companies gross margin. Historically savings on indirect or expense categories has been larger than those of products for resale. In fact it may only represent a 1/3 of the gross margin line.
As an example let’s take a look at a retailer that does $1B in gross sales and has cost of goods of 70% or $700M. This retailer’s gross margin is 30% or $300M. About $100M of that is available for e-procurement related price compression. Savings promises are really all over the board depending on what e-procurement provider you talk to and how they measure actual savings. Let’s assume you do indeed source the entire $100M in indirect spend and end up saving 15%. If (and it’s a big if) all of the savings make it to the P&L, savings would total $15M. Now let’s take a look at the cost of goods (COGS) line. All of this is available for price compression. Let’s target just 50% of the spend in year one or $350M. If we assume savings here to be only 50% of what we see in the indirect spend area or 7.5%, savings generated would total $26.25M.
With the above very hi level calculations, let’s go back to the original premise of where a company should get started. This authors answer is actually everywhere. You should use these tools in the form of e-procurement to standardize the way you conduct sourcing. Maybe you’ll drive $41.5M in savings from both direct and indirect areas.
If you’d like to understand an easy six step process in order to accomplish these types of results without adding to your staff, please contact a SafeSourcing Customer Services Account Manager.
We look forward to and appreciate your comments.
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