Now, more than two years after the economic meltdown, the industry understands that prosperity is not around the corner. What many call the "New Normal," characterized by slower growth, tighter credit markets, a more conservative approach, less money available for investment, and tighter financial regulations, has become the new operating reality.
It doesn't have to be all doom and gloom, however. Even in the best-run organizations, there is an untapped source of cash from what I like to call "creating your own stimulus by buying items and services better." In many companies, the cost of purchased items and services (i.e., the money paid to suppliers) is equal to between 30–70% of total company revenue. In the pharmaceutical industry, this cost is typically between 30 and 50%. What I've come to understand is that regardless of how good or how bad a company is at buying products and services, there is still plenty of cash to extract from its costs. Three methods—spend segmentation, better specifications, and online reverse marketplaces—can improve results.
For example, if a company is making a purchase where the supplier maintains the power in the relationship (i.e., the "critical" quadrant), the buyer is paying an absolute premium. Typically, less than 10% of a company's spend will be designated as "critical," according to my experience. Companies with poor purchasing practices, however, often allow suppliers to act as if they were a natural monopoly. A purchaser should review its spending to move supplier relationships from the "critical" quadrant to "strategic" or better yet to "leverage" positions (see Figure 1). My experience suggests that on average, only 20% of spend is truly "strategic," and most of what is purchased can be highly leveraged among multiple suppliers.
Better specifications . Many factors determine how much to pay for a good or service. In simple terms, supply is what is available, and demand is how much is being requested. Consumption is how much is being used at what rate, and specification is what constitutes a product or service. The interactions of these variables are the main drivers of price paid.