How to conduct management consulting projects devoted to Purchasing & Procurement

During Consulting Projects, a lot of attention will be devoted to Purchasing & Procurement. Usually, this area generates big cost reductions and helps improve liquidity. Finding potential savings is not always easy and requires a well-organized approach to company purchases. Luckily, there are a lot of techniques and frameworks that will help you in a structured way to look for savings and potential improvements in liquidity. I will try to summarize them.

In this post, I will show you the main concepts.

What is Purchasing & Procurement?

In short, Purchasing & Procurement boil down to buying things that the company needs. If you are a production company, you will be mainly buying a lot of raw materials, services but also technology. Other businesses that run retail operations, or e-commerce will be buying rather ready-made goods that they sell to the customer. In such businesses, the activity of buying goods will be called category management or merchandising and is a wider concept. Category management will be in many cases a mix of pure buying and marketing. Category managers have to select suppliers, decide which product to sell, at what price, and how to market them.

On top of that firms also buy a lot of other things: machines, technology, computers, consulting services, office space, and many more.

Most firms will have this purchasing function scattered all over the firm. For example, purchasing of new IT system will be done by Finance & IT Departments, whereas purchasing of the new production line by Production Department.

Let’s have a look at the typical problems in Purchasing that you may come across during consulting projects.

Useful Frameworks

The goal of management consulting projects devoted to purchasing is usually to cut costs and generate more cash. That’s why it’s a good idea to revise frameworks in 3 main areas before the project start.

1. Cost Reduction Framework. During many projects, you will have to cut costs. There are some standard ways to achieve that. A big part of them can be achieved by analyzing Purchasing & Procurement. Below you can find a movie showing the framework that we use:
   
2. Inventory reduction Framework. One of the ways to generate cash is to reduce inventory. Most of the projects aiming at inventory reduction are done in cooperation with the Purchasing Department. Let’s see how you can do that in practice:
   
3. Improve Payables. Once you are done with inventory it’s time to talk with the suppliers about payment terms. To have more cash on your hand you have to convince them to wait a bit longer for their money. There are also some other tricks that you can use: you can look for new suppliers, consolidate the existing suppliers, and use it as an excuse to get better payment terms. Some firms improve their payables by using consignment stock or reverse factoring. A lot can be achieved also by playing with the frequency of purchase and changing the moment of issuing invoices.

Quick Wins

Management Consulting Projects are expensive that’s why you have to show fast some interesting results to the impatient client. That is why you will first start by trying to look for quick wins (low-hanging fruit). Let’s first start by looking at the definition of quick wins:

Now let’s see how we can apply it to Purchasing & Procurement

By identifying fast, quick wins you get the attention of the client, and you win his trust. Usually, you will try to identify and show projects that you believe can be quick wins within the first or second week of the project.

Bear in mind that to find quick wins you first have to consolidate all data on things that the firm purchases. Only a fraction of purchases will be done by Purchasing Department. The rest will be done by other departments especially Finance, Production, Sales, and Marketing.

Potential projects will be analyzed to confirm whether you were guessing correctly the potential of those projects.

Analyses you conduct

We know that we need to do in-depth analyses. By analyzing data, you want to find ways to cut costs and increase cash. Let’s see what options you can consider

1. Make-or-buy analyses. Many things can be either done in-house or bought from a supplier. When you analyze purchasing you will come across many groups of materials and services that will require this approach. You may discover big potential savings. For example, in one of the firms, we were able to decrease by 70% the cost of security by outsourcing it. Let’s see how you conduct this sort of analysis:
   
2. Capex vs Opex. In many situations, the same effect can be achieved by using a different mix of Opex (Operational Expenses – especially labor) and Capex (Machine, software, etc.). In this sort of analysis, you compare both options (low Capex vs High Capex) and you try to find the optimal solution.
   
3. Scenario Analysis aimed at reducing usage. You will also try to look at different scenarios and options of using specific materials or services to find cheaper options. The aim is to look for such options that help you reduce the usage of materials that are a big purchasing position (you spend a lot of money on them. For example, if you want to reduce the costs of running stores you can look for ways to have fewer people (e.g., by improving the planning of shifts or switching from 8-hour shifts to 10-hour shifts), making the stores smaller (get rid of unused space). If you want to learn more about Scenario analyses, I recommend checking the example in which we try to decide whether to invest in MBA.
4. Price renegotiations. If you cannot reduce the number of used materials, you can try to work on the price. In many cases, firms don’t check alternatives so you can get a better price by finding new suppliers or renegotiating with existing ones. To achieve better prices, you may have to reduce the number of suppliers (if you have too many of them) or increase the number of suppliers (if there is a monopoly). It’s also worth checking the seasonality of prices. For example, products like wheat and barley are the cheapest around September when most of the grains are collected from the fields. Afterward, the price of grains goes steadily up. In many situations, it may make sense to buy everything you need in September instead of buying every month. To check this, you have to check whether the savings in prices will be bigger than the costs of warehousing the grain.
5. Specification overview. One of the ways to determine exact requirements before you buy something is to create the so-called specification where you describe what is needed. By analyzing the specification, you can find ways to cut costs without decreasing the satisfaction of the customers. In many situations, specification is not adjusted to the current needs of the customers. Moreover, specifications are not often refreshed so they may be based on old, non-existing situations or technology. This group of analyses will have also standardization of materials used and switch to modularity. Let’s look at an example of such an analysis:
   
6. Contract Analysis and renegotiation of terms. The last thing that you can do is to analyze contracts and renegotiated them other than price terms. By changing the terms of payments, minimal quantity that you have to buy, etc., you can lower the inventory and improve the payables. In this way, you are able to improve the cash flow of the whole firm, even if you don’t manage to find savings.

That’s in short. As always, I recommend checking for more examples of our online course Purchasing & Procurement for Management Consultants. You will find there +5 hours of content and more than 110 lectures, that will teach you all the things you need to create great charts fast as a Management Consultant.

Have a look also at our post on how to cut costs and how to improve the cash flow of the firm.

You can also check the post in a form of a presentation: Purchasing & Procurement for Management Consultants.