2 Ways for Procurement to Uncover What’s Driving Costs Up

Getting better insight into what makes costs go up can be difficult, but is necessary for the procurement department to make smarter decisions.

Does procurement at your organization investigate cost drivers for every purchase? Or does the department focus only on critical high-cost purchases — which they assume are most critical to strategic priorities? Assumptions, and a lack of understanding across the spectrum of purchases, can result in poor procurement decisions.

If procurement pushes a vendor for additional savings, for example, the supplier might trade off another critical priority, such as quality or safety, that could harm your business. To properly diagnose what drives costs, procurement needs to delve into supplier-driven and business-driven cost drivers separately.

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Tap unused, low-confidence data for hidden insight into supplier pricing

Procurement teams tend to build cost models based on information in which they have confidence, such as data verified through benchmarks. They are more hesitant to draw on unfamiliar or less certain intelligence, such as conflicting perspectives from subject matter experts.

The key is to consider the source. Procurement leaders should show employees how to use imperfect data — information that can provide valuable insight but was likely neglected because they didn’t fully trust it.

For example, one food and beverage company provided staff with a set of guidelines on when, how and why to use different information types based on whether the data is a fact, an estimate or a best guess.

Find out what effect the business has on costs

Does the business regularly make last-minute changes to orders or specification requests? Do teams require a significant amount of customization for the products or services they buy? Do they regularly submit rush orders to vendors? For higher spending that results from actions by the business, procurement should collaborate with suppliers and business partners to identify behaviors that inflate prices.

Procurement can gain critical insight into which actions are changeable — particularly those that will lead to the most savings

To determine the effect that internal stakeholders have on costs, procurement leaders should brainstorm potential issues like these and ask suppliers for feedback. Use questions such as:

  • How do these particular situations affect your work with us?
  • Are there other factors not listed here that affect your costs?
  • What changes could we make that would reduce costs?

Through this discussion, procurement can gain critical insight into which actions are changeable — particularly those that will lead to the most savings. This can be discovered by understanding how significant the impact is on supplier operations and how willing or able the business is to change the cause of this issue.

This article is excerpted from the 3Q19 issue of Fi.r.st. – The Gartner Journal of Finance. Risk. Strategy.
Jessica Kranish is a Senior Principal in Gartner Research & Advisory Assurance Group.
Gartner for Finance can read the full article by Jessica Kranish in the 3Q19 issue of Fi.r.st. –The Gartner Journal of Finance. Risk. Strategy or Prioritizing Cost Driver Analysis by Effort.

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