Cost savings and margin optimization projects are back in vogue, as retailers refocus on their bottom lines following several years of revenue growth during the COVID boom.
Amidst the belt-tightening, retailers are now emphasizing a few key initiatives rather than an expansionary focus, adopting a “less is more” approach.
As you evaluate your priorities for the rest of this year or the next, and if cost savings are on your agenda, you may be wondering where to start.
Here are a few ways to gauge savings potential across your business, drawing on almost a decade of insights from working with clients in this field.
- Time since the purchase category was last negotiated
A clear-cut way to unearth the largest savings opportunities is by understanding when the category was last sent to bid or negotiated.
Never? Or has it been a long time? Chances are the category offers substantial potential.
Take, for example, a retailer that had never run a dedicated category management negotiation process despite almost a decade of growth. They had negotiated one-off deals with selected suppliers in the past, rather than running a competitive bid process. The retailer initiated a 6-month negotiation process across all categories and exceeded their savings target by 90%.
The biggest savings gains are most often found in categories that have previously been untouched because of the compounding effect of price increases over time and because of a lack of (re-)evaluation of suppliers to meet the category’s goals, which often change over time.
- Sourcing credible alternatives to current supplier(s)
A second consideration for gauging cost savings potential across your purchase categories is determining when you last made a dedicated effort to identify credible alternatives to your current supplier base.
Of course, this doesn’t mean that your current supplier(s) aren’t a good fit. However, having credible alternatives increases your leverage and ability to achieve the best outcome for your organization.
In negotiation parlance, this is referred to as your BATNA or your Best Alternative to a Negotiated Agreement.
Walking into a negotiation with credible alternatives (e.g., you could switch suppliers and still deliver a similar experience/value for your customers) ensures you can negotiate from a position of strength to maximize value for your organization. Depending on the category, this could mean having anywhere from 3-5+ supplier alternatives.
If your organization has not gone through the exercise of identifying credible alternatives to your current supplier base, chances are you are leaving some form of value on the table.
- Employing proven processes to negotiate and select vendors that best meet your category’s goals
Lastly, and somewhat related to finding alternative suppliers, if you haven’t deployed a structured process to bid out important purchase categories, there’s further room for savings.
Of course, you don’t always want to select the lowest-priced supplier for your categories. But running a structured process helps a) identify and achieve the goals you have for your category and b) negotiate the best deals for your organization.
Employing tailored processes for your organization to select suppliers for different types of spend is a proven way to drive year-over-year savings.
As an example, a retailer was seeking to select a key service provider for its supply chain, which would more than $100M in purchases over a three-year period. The retailer had an existing provider but wanted to go through a structured process to align the goals of the service spend from the CEO on down, while also securing the best deal for the organization.
Using a proven process for similar service negotiations, the retailer was able to run a multi-stage competitive bid process to evaluate 8 providers. Ultimately, the retailer landed on a new provider that best met the retailer’s goals while also being more competitively priced than the incumbent. Best of all, the organization was fully aligned with the strategy and supplier selection across multiple functions.
Employing a structured negotiation process with clear deadlines and a dedicated team to evaluate bids and provide feedback to vendors is a proven way to drive consistent results for your organization.
What other data points do you use to evaluate savings potential in your organization?
