Benchmarking costs: are you getting the best price from your suppliers?
Over the past twelve months, Grant has met with several businesses to discuss how Expense Reduction Analysts may be able to help them optimise their costs.
One commonality of those meetings is that most believe that they are getting the best prices from their suppliers. Only one person he met with mentioned that he didn’t know how he fared and was keen to know how competitive his procurement was comparative to his peers.
While we acknowledge that every business’ needs differ and that price is not the sole reason companies use or stay with a particular supplier, even when they are unsure just how competitive their pricing is, we believe the benefits of benchmarking costs against similar companies or organisations is invaluable.
So Grant, how do you know if your procurement is competitive?
Recently I met with the CFO of a company and as I was leaving, he quoted to me the price they were paying for copier paper, with the comment that he considered it was the best price he could obtain, and if I found a better option then he would be interested.
Shortly after that, I was doing some analysis work for another business and paper prices were one of the categories we were looking at.
Comparing the two sets of prices on a like-for-like basis we found there was a 9% and 3% difference between the two businesses on two different grades of paper. The interesting side to this is that the considerably smaller of the two businesses was getting the better price. Remember, this is on a like-for-like basis.
This led to me wondering: how do businesses know if their procurement is competitive? While everyone is seeking a competitive advantage, few businesses openly disclose what they are paying, therefore as a business it is difficult to know if the prices you are paying are competitive. There is a lot of guesswork and uncertainty.
Some of the common options often mentioned by companies that try to understand how competitive their prices are the need for:
- tendering through a structured RFP process;
- engaging one-on-one with different suppliers to compare what they are offering;
- online searches; and
- talking to peers.
All these options take time and effort, some are more effective than others, and some companies may still not be sure where they stand.
The other one to consider is benchmarking. This does requires working with an independent third party, for example Expense Reduction Analysts, or setting up a process that collects data from multiple sources and allows for the analysis. By working with an individual third party who works across multiple businesses and industries at any one-time, companies get the real-time benefit of the wealth of knowledge around prices, suppliers and market trends.
What’s involved in benchmarking?
Benchmarking, in its simplest terms, is comparing your prices with that of other companies on a like-for-like basis.
A one-off benchmarking exercise will help tell how you compare at a given point in time, but to be effective, any benchmarking exercise should continue over a period of time at regular intervals to understand trends and cycles and how you compare within those cycles.
How do I use benchmarking?
While it is useful to understand how you compare to your peers, on its own it probably doesn’t pass the ‘so what’ test.
Effective benchmarking can help you identify areas to follow up with your supplier. It can help you have those discussions from a position of knowledge (power) when negotiating new contracts or prices – that in itself is pretty powerful stuff.
Benchmarking can be used to help drive decision making around whether it’s worth undertaking an RFP process, or it may help you identify that you are already competitive, and a tender process may have limited impact.
A benchmarking process that tracks prices over time is powerful to also understand where prices are going. For example, are they trending up or down, or are they stable?
How often should companies engage in benchmarking?
Different companies will have different requirements for benchmarking. Some companies may just want to know where they stand at a point in time, such as during a review of their procurement strategy, while others may want to track their procurement over time and start looking for trends and anomalies in their costs against contracts, agreements and the market.
One company I work with tracks prices monthly and has been doing so for 10 years. They have built a wealth of knowledge on market trends and cycles and regularly take advantage of these to adjust their purchasing and prices.
Why should you consider Expense Reduction Analysts for benchmarking?
When we are engaged by a client, Expense Reduction Analysts tracks and reports on costs and performance for a two-year period on a quarterly basis. This allows our clients to address any anomalies as they occur, while at the same time affording them the benefit of being assured they are competitive.
So, can benchmarking help save you costs? Yes, it can and some of the reasons that you should consider benchmarking are:
- helping you understand how you compare with your peers;
- giving you real-time feedback about the market; and
- leading to better discussions with your suppliers.
If you would like to discuss how benchmarking may be able to help your business, or you are considering cost optimisation you can contact Grant at email@example.com or visit at au.expensereduction.com for further information.
We help clients to support the health and growth of their business, whatever its nature, focusing on proactive expense and supplier management. As an Australian and global company, Expense Reduction Analysts can benchmark costs and spending, follow the latest supplier innovations, and have real-time data on changes and advancements. This strength gives Expense Reduction Analysts the recognition and power needed on supplier markets to best serve your interests.
For more information please contact Ruth Cohen at firstname.lastname@example.org