Acres of Diamonds: the value of effectively managing low-dollar, high-volume spend

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, 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 the 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.

Since the majority of current applications are structured around a contract creation–compliance management process, a palpable vacuum has 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.

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.

The following analyses show the potential savings that exist with low-dollar, high transactional procurement outside of a centrally negotiated contract. All costs are in U.S. currency. The chasm between the floor and the ceiling price — not the negotiated rate — is where the opportunity sits.

When determining which commodities are likely to generate the greatest potential for Cost of Goods savings, it is important to establish historic trending relative to price fluctuations.

Where there is historic fluctuation in cost mirrored by a steady downward trend — the HP LaserJet 3550N, moving from roughly $900 to $650–750 over eight quarters — the likelihood for significant COGs savings is substantial. Conversely, where there is minimal fluctuation resulting in a flat line trend — the HP LaserJet 9050DN, effectively parked at $3,500 — the likelihood for savings is greatly reduced.

This holds true even within the same commodity group, involving closely related items: the Enterasys Matrix C2 flat-lines around $3,100–3,500, while the Enterasys Mini GBIC falls from roughly $1,200 to under $200 over five years.

True savings are inextricably linked to efficient, real world processes. With discretionary spend caps being raised on a consistent basis, the importance of deploying a solution that will meet with ready approval on the front lines is critical to achieving sustainable results.

It is our position that a true centralization of procurement objectives requires a decentralized architecture that is based on the real world operating attributes of all transactional stakeholders, starting at the local or regional level. In other words, your organization gains control of its spend environment by relinquishing centralized functional control in favor of operational efficiencies originating on the front lines. This is the cornerstone of agent-based modeling.

By focusing on the areas of spend which provide a significant return in the shortest period of time, your organization establishes a solid foundation for continued initiative expansion and success across the broader enterprise. The key is to recognize the opportunities for savings that are not currently being cultivated within your company.