A survey by Bain & Company revealed that more than half of respondents face cost pressures that restrict their company’s ability to make strategic investments. This is worrying, after all, these acquired costs represent between 25% and 60% of a company’s total costs, depending on the sector.
On the other hand, when supply costs increase, so do business opportunities to find a new source of untapped margin. By taking a more comprehensive approach to what is purchased and how it is purchased, companies can free up resources to fund other business priorities. This means implementing a set of tools that improve price negotiation and make the use of supplies more efficient.
Strategy flaws
Negotiations are present in different phases of a company's life. This work requires the negotiator to have a perceptive and global view of each situation. This allows them to make decisions more confidently, quickly and assertively, and to analyze every detail of the business.
The negotiation must have an outcome that satisfies those involved, even if each party has a different objective. However, efforts to improve commodity acquisitions face some challenges.
- Unrealistic goals
Many companies set cost reduction targets for categories that involve spending. They often use high-level benchmarks to justify these targets. The mistake is not investigating the cost impacts that a particular type of spending might have. - Lack of focus
The company tries to attack 20 expense categories simultaneously, with abrupt changes in policies and approaches that only cause confusion among employees who do not understand the objectives of such changes. - Lack of integration
Decisions are made solely by the purchasing department, without involving the business and finance areas. This is the main problem: normally, the purchasing area is not part of the company's strategic decisions, leaving the sector to control what is considered "easy", which is the price paid for commodities, where there is a business strategy behind the process. - Lack of long-term strategy
Executives involved change priorities quickly. There is no maintenance of the strategy to sustain the company's progress. Behavior changes and a new commodity acquisition policy is adopted, without taking into account what has already been done.
Talent for negotiation
It’s not enough to have talent to be a good negotiator; you need to involve the right people from the beginning of the process. You need to set goals for the entire company and assemble teams with influential leaders across the purchasing, finance and business areas.
It is important to be careful not to overload the metrics used. It is important to focus on just one or two critical metrics related to the desired behavior. The best companies in the sector have check-in processes between the finance, purchasing and business areas that focus on these metrics. These companies also have the ability to make quick decisions about exceptional spending. In addition, it is important to pay attention to the analysis of spending trends, focusing on the categories in which there are changes and those in which results are declining.
As input costs continue to rise, so does the need to keep them under control. This challenge is not easy, but it is the difference in a company that proves itself capable of making strategic investments to ensure its survival in the market.
CostDrivers has a market trading platform with resources and support from consultants to create parametric formulas that help visualize the historical evolution of input costs.