This white paper examines how companies are successfully realizing benefits from their procurement initiatives and are viewing procurement as an integral part of their overall corporate strategy. They no longer perceive procurement as a cost center, but rather as a strategic lever for improving profits or funding new initiatives.
PROCUREMENT:A Strategic Lever for
Bottom Line Improvement
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white paperA Time for Impact
With continued softness in the economy and increased competitive pressures,companies are finding themselves besieged by investors and corporate boardsdemanding stronger financial results. This escalating demand for enhanced performance, coupled with the rising scrutiny and skepticism of the financial markets, indicates that fresh and creative approaches are needed to improve bottom line performance and maintain year-over-year corporate growth.
How can companies most significantly impact their bottom line in the shortest amount Hard dollar costof time? In a phrase: Hard Dollar Cost Reductions. For a company enjoying 10% reductions areprofit margins, an overall cost reduction of as little as 5% can impact top line growth the shortest pathby 20%. While specific corporate results vary, the principle remains constant; to bottom linesaving money has a greater effect and requires fewer resources than making improvementsmoney. While companies are targeting long-term growth, internal changes can bemade to generate near-term benefits. Further, these cost reductions can becomea competitive differentiator, supporting progress and providing flexibility in anunpredictable market. As a result, many companies are looking with a strategiceye toward what has historically been a tactical function: Corporate Procurement.
Procurement: A High Reward, Low Risk Opportunity
As companies weigh the relative costs of various methods to increase profitability,the value of cost reduction, through a more strategic focus on procurement, becomesself-evident. Companies typically spend between 50% and 80% of revenues onthe procurement of external goods and services (see Figure 1). Even small costimprovements to these expenditures can quickly yield significant bottom line benefits. And when correctly executed, these improvements can create sustainableyear-over-year cost reductions to support continued profitability and growth.
CableTelecommunications Carbon Steel Machinery40% 60% 43% 57% 45% 55% As a % ofSales RevenueOther ExpPur $Textiles/Apparel Paper Transportation
46% 54% 54% 46% 32%68%
Figure 1. Typical Procurement Expense Profiles for Service and Manufacturing Companies
Procurement White Paper www.icgcommerce.com tel 877.935.ICGC 1Figure 2 illustrates this point by showing the financial impact of a conservativecost reduction when applied to a company with a 15% operating margin and a typical expense profile (65% of revenues are spent on direct and indirect materials).In this example, a 5% reduction in indirect expenses alone generates a 34%improvement in earnings per share for a company with a 10% operating margin.
With 5% Procurement As Reported SavingsRevenue $10,000 $10,000 COGS ($9,010) ($8,560)Indirect ($2,208) ($1,758)Direct ($4,793) ($4,793)Other ($2,009) ($2,009)Operating Income $990 $1,440 Interest and Other Income $213 $213 Taxes (@ 38%) ($376) ($547)Net Income $827 $1,106 Net Shares Outstanding (M) 213 213Earnings Per Share $3.88 $5.19 P/E Ratio 10 10Market Value Per Share $38.82 $51.92 Improvement 34%
Figure 2. Example of Procurement Impact on Earnings per Share
While the financial impact of procurement is dramatic, the associated risks and Procurement
costs are relatively low, especially when compared to other cost reduction initiatives savings are
such as decommissioning plants or layoffs. Rather than contending with the negative a low risk,
impact created by more drastic cost-cutting measures, procurement initiatives positive impact
generate the best kind of results: positive reports of improved profitability. alternative
High-value Opportunities to Drive Immediate Savings
So how can a company identify the highest impact cost reduction opportunities? Begin by
To begin, they must understand what they buy and from whom they buy it. understanding
Thoroughly reviewing accounts payable history and mapping expenditures can spend
provide tremendous insight into corporate savings opportunities. In-depth analysisand classification of more than $80 billion in spend reveals the following commonissues and findings:
Procurement White Paper www.icgcommerce.com tel 87... [download for more]
