The lean operating model was conceptualized sometime around the fifteenth century, at the Arsenal of Venice. Venetian shipbuilders created an assembly line to standardize production and, in doing so, were able to build naval vessels faster and cheaper. As the centuries passed, the Venetians continuously sought to improve their operations and experimented with new ways of working. The quality of their vessels improved with each adaptation, and the shipbuilders made it into the history books.
Fast forward 500 years. Every business wants to emulate the core principles of a lean operating model: high customer value, with minimal or no waste. And they can, if they’re able to plug cash leaks and free up resources for continuous innovation.
A procurement plan can help you build a lean operating model so you can prevent cash leaks that come from wasteful spend.
At the organizational level, a procurement plan outlines what an organization plans to spend in a given time frame. It identifies specific needs, a budget for obtaining supplies, and approved vendors from whom to procure those supplies. A procurement plan requires you to think strategically about spend, but it shouldn’t be difficult to create. A spreadsheet works well enough.
Businesses that formulate a procurement plan can optimize their spend and empower employees to proactively look for cost efficiencies. Following are four ways these benefits can help curb wasteful spend.
1. Gives a holistic view of business needs so you can optimize spend
A procurement plan that outlines spend at the organizational level allows you to identify patterns and redundancies in your purchasing needs.
Budgets are often created and executed at the department or team level, which can lead to redundancies. Let’s say two employees from separate departments subscribe to the same software solution. A procurement plan would expose this redundancy and enable the organization to invest in a single team plan, reducing the overall subscription cost.
Or let’s say two departments know they will require a few hours of work from a freelance designer each week. A procurement plan makes it easy to see this overlapping need. Then, the two teams can coordinate to hire the freelancer by day instead of paying a higher hourly rate independently.
Planning a year’s spend in advance also creates opportunities to receive discounts. Many vendors will give discounts if you buy in bulk or commit to an ongoing order. Businesses should identify any recurring orders during their procurement planning and ask about these discounts.
2. Reinforces your purchasing policy to prevent maverick spend
Procurement plans guard against spend that is over budget, unnecessary, or fraudulent by reminding employees of the company’s purchasing policy.
Two out of three employees haven’t read their company’s expense policy, according to AllStarCard. A procurement plan gives organizations a prime opportunity to tell employees, “This is how we intend to spend this year, and all of your purchases must map back to this plan. Purchases that don’t map back to this plan stand in the way of achieving our goals of X, Y, Z. And, by the way, if you don’t adhere to our policy, we won’t approve your expense report.”
Most employees want their business to achieve its goals. Employers need to articulate what those goals are and explain how maverick spend stands in the way of achieving them. Anyone who still fails to follow the purchasing policy should face repercussions.
3. Allows you to get a head start on ordering to prevent costly delays
Spending on an as-needed basis leaves too much room for error. A procurement plan helps you build a structure for employees, so they can submit orders early—or at least on time—as a matter of routine.
Late orders can be costly. If the supplies you need don’t arrive on time, someone from the team has to run out to the store to buy them. Let’s count the waste: employee time, duplicate purchase, purchase at a markup price. If you’re a coffee shop in need of milk, that amounts to about $20, if we figure an hour of an employee’s time, and $5 for the dairy. Quite the markup for something that should have cost $3.
But what if you’re a coffee shop, and your signature espresso doesn’t arrive on time? Now you have to tell customers you can’t sell them their favorite beverage, putting your sales in jeopardy until the espresso arrives.
You know if you place an order at the last minute, it’s going to take ages to ship. Establish a procurement plan so your team can either get ahead on purchasing or set up automatic reorders.
4. Gives employees visibility into spending goals
Like we said before, employees want their employer to succeed. Share your procurement plan with employees to give them transparency into spend across the organization. This way, employees can help the organization save cash when unexpected expenses arise.
Take the example above, where two employees from different teams were using the same software. Had the two employees known they were subscribing to the same software, they might have coordinated to purchase a team plan.
Additionally, a procurement plan allows team managers to set their budgets against the broader organizational goals and plan for spend when it is most convenient for the organization. This doesn’t necessarily cut costs in the long term, but it helps ensure that the business has enough capital at all times to achieve its value-add goals.
In essence, this type of budget planning keeps the company’s working capital, or the difference between a company’s current assets and liabilities, high. The significance of this feat shouldn’t be overlooked. According to a report from PwC, global firms could have freed up as much as €177 billion ($214 billion) in cash in 2017 to support growth and innovation if they had improved their working capital.
Plug cash leaks in 2021 with a clear procurement plan
“2020 went exactly as planned,” said no one ever. But don’t let the past year discourage you from planning.
We have a pretty good idea of what 2021 will look like (knock on wood). Offices will be closed, at least temporarily. The majority of employees will work from home. Spend will come from as many locations as you have employees.
You can prevent spending from becoming haphazard while your employees are dispersed. You just need to think a little bit more like a Venetian and create a clear procurement plan to ensure that all spending improves your bottom line.