The benefits of a commodity spending analysis are numerous and far reaching. Many businesses lack the resources to undertake the task, and as a result, neglect to make it a priority. And leave profits on the table in the process.
Knowing what you are paying for commodities and to what vendor is a great way to stay on top of your costs. And finding new buying opportunities that reduce your spending on direct materials increases profitability. Some experts say that a 5% decrease for direct material spend has the same effect on your bottom line as a 30% increase in your sales.
The best way to decrease what you spend is to know what you spend now. This information is gained from a Commodity Spend Analysis.
There are several benefits to a Commodity Spend Analysis:
- helps you manage your commodities purchases
- accelerates cost reduction cycles
- enables effective negotiations with commodity vendors
…and most importantly,
- REDUCES your direct spend on them, and INCREASES profitability.
Sounds pretty good, right? Why doesn’t everyone do one then?
Frankly, a cost spend analysis can be a trickier than you thought. And can also be a resource hog for your Accounts Payable (A/P) staff.
What makes it tricky? Several things, including:
- Fierce competition. With commodities, competition is just part of the deal. So getting a deal can be a lot of work to keep straight who promised what to whom.
- Downward pricing pressures. Everyone buyer wants it cheaper and every CEO told them they had to get a better price, or else. Even today, with the improvement we see in the economy over the past five years, most departments are still operating on smaller budgets than in the past.
- Unstable economy. One only needs to look at his or her investment statements to see that we are hardly in a stable economy yet. This uncertainty puts the focus on being prepared for a downturn by having your books in good shape.
- Fewer resources are available to spend the time. All of these factors have direct effects on the A/P department, too. With less staff to distribute the load, everyone is carrying more and has less time to devote to cost analysis for commodity suppliers.
With all these factors working against commodity spend analyses, it’s no wonder that few A/P departments invest in what it takes to gain a complete understanding of where their money is going—at least as far as commodity spending.
However, the benefits of a Commodity Spend Analysis are undeniable. The drawbacks are, too. So for many A/P departments, it remains one of the forgotten “to-dos” or becomes part of their “nice-to-have” agenda. In these cases, outsourcing the commodities cost analysis is a great way to get the information you need to make better decisions moving forward.
With the economy, today that continues to seek terra firma, reducing commodity costs is a hot commodity when it comes to increasing profits. And we’re sure we can all agree that increasing profits is one item that is more than “nice-to-have.” And depending on the industry, more pressing than “nice-to-have” as well.
What profits are you leaving on the table in your commodity spending? Isn’t it time you found out?
Chris Bower is the Vice President of Business Development for AP Recovery, the undisputed leader in off-site recovery audits and prevention technologies for disbursement management. Chris leads the APR team through new partnerships, client relationships and industry advancements. With his ear to the ground in every vertical AP Recovery operates in and constant communication with clients, Chris is in tune with every corner of AP Audits.