Acres Of Diamonds: The Value Of Effectively Managing Low-Dollar, High Transactional Volume Spend

ACRES OF DIAMONDS

The Value of Effectively Managing Low-Dollar, High Transactional Volume Spend

September 2005

ACRES OF DIAMONDS: The Value of Effectively Managing Low-Dollar, High Transactional Volume Spend

The fact remains that the majority of procurement initiatives have traditionally focused on the big bang high-dollar, leveraged spend approach to procurement. While this approach is appropriate for certain commodities utilizing an event-centric tool, extensive research including a CAPS 2003 study indicates that it does not create a sustainable COGs savings model. The examples provided by the Floor to Ceiling Analyses included with this report provides further confirmation of this assessment.

What is interesting to note is that low-dollar, high volume procurement is often overlooked by the majority of purchasing departments and software vendors, whose time and energy is usually focused on negotiating the big dollar contracts. This occurs despite the fact that statistical analyses of purchasing trends in both the public and private sectors consistently verify that approximately 90% of all transactional activity relates to purchases of $25K or less. Ironically, low-dollar transactions also represent the greatest potential for sustainable savings. This trend is likely to increase in scope as discretionary spending caps are raised to accommodate front line efficiency requirements.

In one government agency analysis conducted by e-Procure, of the $215 million in total annual expenditures $37 million was related to purchases of $25K or less. While this accounted for 17% of the total spend, it consumed an incredible 92% of all transactional activity. Referencing historical savings performance, a 10% reduction in COGs alone is well within the achievable range for these low-dollar purchases provided they are procured outside of a negotiated contract. Dependent on commodity types, this equates to a savings of up to $3 million in the first year. The fact that both the cost and implementation requirements to achieve these savings are minimal in comparison to the return is a driving factor in the growing recognition of this important area of spend. What is also compelling is the substantial reduction in procurement cycle time, as well as quick and easy access to critical business intelligence. Although considered to be “soft” savings, this is where the most significant results will ultimately be achieved. (It is worth noting that with the majority of government agencies little if any business intelligence in terms of spend activity is readily available. For example, through our discussions with several major suppliers to the Canadian Government, we discovered that this information was actually being sought directly from the vendors themselves.)

Since the majority of current applications are structured around a contract creation-compliance management process, a palpable vacuum has therefore been created relative to low-dollar acquisitions. Recognizing this void, and in an attempt to make the need fit the solution, software vendors are attempting an all encompassing “transactional pull” by way of creating master contracts for as many commodity groups as possible. Citing the purported merits of leveraging volume discounts through standing offers, coupled with the creation of “buyer-centric” tools promising easy access to electronic shopping malls, proponents of the catalog architecture are pledging big returns. In reality, the results are less than stellar. Agencies such as the Veterans Health Administration as well as other similar type organizations in both the public and private sector provide testimony to the fatal flaw of this approach.

The constant refrain from front line buyers that “they can usually obtain better pricing with one phone call” versus purchasing off of a negotiated big dollar contract is just one of many insurmountable hurdles. From both a buyer and supplier point of view, the myopic utilization of a catalog-based system for dynamic, low-dollar transactions quite simply does not work in the real world. Exacerbating the situation is also the belief that the propagation of big-dollar contracts will minimize the engagement of the SME business community. Recognition of this concern is reflected in the new statutes and legislation states such as North Carolina and Washington are creating to actually enhance SME participation.

The following Floor to Ceiling Analyses provide additional insight into the potential savings that exist with low-dollar, high transactional procurement outside of a centrally negotiated contract. Please note that all costs are in U.S. currency.

HP LaserJet 9050DN NETWORK-READY (Q3723A)

Current

Floor $2,999 (w/estimated shipping $3,399)

Institution (last buy) $3,455

Ceiling $4,428 (w/estimated shipping $4,728)

HP Input Tray (C8531A)

Current

Floor $588 (w/estimated shipping $698)

Institution (last buy) $805

Ceiling $924 (w/estimated shipping $1,034)

HP LaserJet 3550N Laser (Q5991A)

Current

Floor $552 (w/estimated shipping $652)

Institution (last buy) $875

Ceiling $1,215 (w/estimated shipping $1,315)

NOTE: The posted Floor and Ceiling costs are the result of a market analysis for a single quantity, non-dynamic purchase. The numbers are derived through an amalgam of multiple sources as a means of establishing the chasm between the current Floor and Ceiling for the listed item. While the respective Floor and Ceiling costs will likely be lower as a result of a dynamic acquisition, the chasm or percentage difference will usually remain constant.