The Cost Consultant Group: Cost Savings Ideas for Office Products & Supplies

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Cost Savings Ideas for Office Products & Supplies

by Nancy Stanton, Principal, Alliance Cost Containment

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The only way to increase profits is by growing top-line revenue or reducing expenses. Growing revenue in our current economic climate is very difficult. Because there is approximately a 4-to-1 ratio on increasing revenue vs. decreasing expenses, a cost reduction of $100,000 has the same bottom-line affect as a $400,000 increase in revenue.

Oftentimes office products and supplies slip under the radar; after all, most office product purchases are typically marginal relative to raw materials or other strategic purchases. The upside here is that because office products are not 'closely watched' as an expense category, there almost always exists ways to save significantly, particularly related to the most commonly purchased items. Often companies do not look at the annual aggregated purchase habits of all departments making office product purchases. These savings may also vastly be higher when companies total all of their divisions and locations.

The purpose of this article is to lay out an overall strategy for generating cost savings in office supplies. Let's start from the beginning, with the assumption that there is very little, if any, office supplies oversight within a company or organization. What are some basic cost reduction strategies and how could they be implemented?

Preparation

Where are you buying your office supplies?

Not so long ago, local office supplies stores dominated the scene. However, with major office supply retailers offering efficient internet commerce sites, expanded product selections, corporate brands, and efficient delivery systems, purchasing from local office suppliers no longer provides financial or practical benefits. Local office supply retailers are essentially second tier distributors forced to mark up products, sometimes significantly, to pay for increased overhead. Retailers have recognized that with the carrying costs of inventories, they no longer can stock the unique items they once did. Unfortunately higher costs are imminent, because most are losing customers. There is more competition and they simply have not done enough to differentiate themselves to retain customers. Customers continually have new product choices as various retail channels try to capture sales. It seems every retailer from grocers to drugstores are attempting to claim a piece of the action that once belonged almost exclusively to the local office supply store. Additionally, the office "big-box" stores have added pressure on sales and thus they are having a much more difficult time sustaining their businesses. And while an argument exists for keeping dollars in one's local community, unless the items are the right items, at the right place, at the right time, they are not actually serving the business needs of the community. A greater argument, one that most CFOs might stand by, is that keeping dollars in the local community means keeping their companies healthy and retaining jobs. They understand that all cost-savings are critical particularly in this new, challenging economy.

So, to the point, major national office providers like Office Depot, Office Max, Corporate Express & Stapleshave the ability to offer lower prices due to their scale, logistical advantage and lower overhead expenses at the very local level. Furthermore, most offer next-day delivery on website orders and will waive shipping costs at certain minimum purchase thresholds. Oftentimes, if you need to get something right away, these suppliers will have a store that is reasonably close. Because of the higher turnover of their inventory, their carrying costs are low and the traffic they generate allows them to offer new offerings that turnover effectively. Because of significant purchasing clout with manufacturers, major retailers often sell the product before they actually pay for the product. This allows them to keep cash flow positive and offer low prices to customers. A bonus to their business customers is that they provide detailed reports of the company's purchasing which allows for better monitoring of total spend.

How much are you spending?

Without a detailed list of what and how much your company spends in office supplies and products annually it is difficult, if not impossible, to capitalize on efficient purchasing. We recommend that you ask accounting to generate a report. Make sure that this report includes office products that are classified elsewhere, such as in a corporate credit card account. If you spend $10,000 or more annually on office products, you've got negotiating leverage with suppliers.

In this list of items you are purchasing, are all consolidated within your company and with one or two suppliers? If you are buying paper from one supplier, pens from another and toner from another, whether or not you have different departments and individuals selecting their own sources, there exists an opportunity to consolidate. Consolidation allows a supplier to understand the true volume potential that you offer, which often results in higher discounts and improved service. Additionally, consolidation reduces indirect costs associated with invoice processing, approvals, and bill payment.

What products are you buying with the most frequency?

Now that you have a list, this should be a simple task. Are they name-brands? Is it necessary to buy name-brand products, or are there alternative, generic products that would work just as well? Exploring alternatives could result in significant savings. Today, the major office supply providers have very high standards for their corporate brands; if their company name goes on the product, they want the best quality representation they can have. With the number of major suppliers sharing markets, they are also competitive and fighting for all the market-share they can.

A wise person once said: "you can't change what you can't measure"! It is critical to assemble these data if you hope to achieve cost-savings.

Negotiation & Working with Suppliers

1. Once you have documented how much you purchase annually, from which suppliers and what items are purchased with the most frequency, you are ready to start negotiating.

2. Select a list of appropriate suppliers.

3. Contact the suppliers.

Make sure that you have reviewed the list with the intention of shifting your purchasing habits so that you create standard purchasing decisions, where possible. For example, is it necessary for ten different black pens? Reduce the SKU count to three, and your volume will allow for greater discounts.
Approach suppliers with information regarding what you purchase, the annual quantities you purchase, any seasonality in your purchasing, and any special requirements that you have. I would recommend approaching at least 3 suppliers. Share your purchasing information with them and ask them for a full proposal including: pricing for the items you purchase with the most frequency, information related to corporate-brand products, catalog discount opportunities, rebate or incentive opportunities, rewards cards, information about any potential hidden costs (shipping, fuel surcharges), and copies of any agreement that you would have to sign.
Indicate that you are willing to sign an annual purchase contract with a non-binding spend requirement in exchange for their best prices and service. At first, agreeing to work with one supplier may seem counterintuitive, and many companies refuse to do it. The rationale is that by using multiple suppliers you can shop around and continually evaluate prices and establish benchmarks regarding what fair market prices are. This may be a great tactic with your major production purchases, but there are several concerns regarding less frequent, lower volume supply items:

o Price comparison - Unless you are a multi-billion dollar company, devoting employees to price-checking and cross-referencing products by brand, sizes, and substitutions then establishing a price per unit so you can make accurate comparisons, it is probably not a good use of your employees' time, even if you are just looking at high volume items. Recently, the Aberdeen Group measured the cost of the requisition-to-order cycle for 260 companies. They found that in a niche with a high volume of transactions like office supplies, with an average order size of only $125, the incremental cost is extraordinary, sometimes as much as $75 per cycle (see article);

o Volume discounts - By utilizing multiple suppliers, you are masking the true purchase volume by your company. You would be amazed at the reaction of suppliers when they discover that a company actually purchases 2-3x as much in supplies as they originally believed; volume will drive discounts and rebates. By signing a non-binding contract with a supplier it deepens your relationship with that supplier and allows them to feel comfortable offering steep discounts because they know that can count on your continued patronage.

o Purchasing standards - By using a major supplier for all your purchases, it gives solid direction to employees by reducing the amount of time they are spending "cherry-picking" for low prices. When management sends a signal that we "shop around" for our products, it not only leads to employees spending more time on the activity, but also creates forward-buying of sale items that can result in "stashes" of supplies, where products can become obsolete or become "stock-loss". For example, when companies are inventoried, it is remarkable how many toner cartridges fill supply areas for printers & copiers that no longer are in use by the firm.

o Monitoring & reporting - By using one major supplier order turnaround is quick and reports are available that make it easier to understand purchasing trends , halt the "hoarding" of supplies at work stations, and analyze information to forecast spending.

4. After receiving supplier proposals take some time to drill down looking for best overall value. Keep in mind that low prices on small volume or inexpensive items like pens, pencils and paper are not a good indicator of potential cost savings. It is best to look at the weighted average of the purchases you expect to make. Suppliers need to make money, but if they can plan their own inventory better, they can lower costs for you. This is the efficiency of supply-chain management. Of course, slower moving items will cost more to provide. The trick for your firm is to review the availability of the corporate brands. But all-in-all because of the consolidation of suppliers in recent years, and because of central distribution, the major office supply providers have recognized ways to keep costs low. They know that cost is important to you and to their competitive position in the marketplace.

When you have narrowed down the proposals, call the representatives (don't email!!) and ask them if there are other opportunities for savings. Most sales representatives benefit from bringing in new clients and gaining business with existing clients, and they certainly are motivated to retain your business. They are measured on their performance. However, it is your responsibility to be diligent in knowing how each supplier will vary their offerings for your business. This is why third-party specialists can be so effective. They have the advantage of insight into negotiations with many companies throughout the country and therefore know the best prices. Furthermore, third-party specialists work with benchmarks based on the purchasing habits of hundreds of companies and organizations and therefore know where price floors lie. They also are very familiar with suppliers and can make educated recommendations based on service as well as price.

5 . Measure your success – Remember that this should not take an excessive amount of time. If you try to compare merely the savings year-over-year, you will find it not a realistic benchmark. Most companies do not purchase the same mix of items each year. Whether new items or just different items, they may have no previous benchmarks in your purchasing history data. Similarly, just measuring spend per employee is not a realistic measure for the changing needs of most companies. Spend-per-employee can be skewed by increases and decreases in staff, project requirements, inventory levels, and other factors that if relied upon, could ultimately result in a degradation of quality in your business.

Many companies use a combination of metrics to create a "scorecard" of benchmarks that make sense to their business and can easily be computed & assessed. A popular method is to use statistically sound estimates. Using weighted averages on a representative sample of past purchases to determine a benchmark of savings is practical. This allows the savings to be measured based on the most frequently purchased items, not on every individual item. This method allows for a quick evaluation of savings and refinement of the list of items where purchase price makes a difference to your company. It also allows your team to focus on item usage by volume, as demonstrated by purchasing volume changes - in other words, focusing on the items that matter. Some might relate this to the 80/20 rule (Pareto Principal), where 20% of the purchases make up 80% of the expenses. While not a perfect system, your scorecard will be able to demonstrate whether the benefits you expected are being achieved overall. By focusing on the top items your team will be able to segregate items that may need to be renegotiated. This allows savings to be obtained for new items that reflect the specific, changing needs of your company. Additionally this method will focus on the items with the biggest "payback" and a better return on your team's invested time in achieving savings.

Other Ideas

If you don't spend six figures in office products, or do but simply don't have the time or personnel to devote to a sweeping office products initiative:

Consider exploring potential group purchasing opportunities. Do any of your industry associations offer group purchasing discounts that your company can take advantage of? If you haven't explored these discounts, you should. While generally not the lowest costs available, these discounts can often get you an easy 10% off retail with a few clicks of a mouse or a signature and a fax.

Consider a cost containment specialist or business consultant. By leveraging their ability to quickly assess, quantify, consolidate, and negotiate new prices you can reap the benefits without distracting your team from higher dollar purchases. These specialists take only about 10-12 weeks to bring back major savings opportunities and require only a few hours of your team's time. Many operate on a contigency bases, so the compensation they receive is a portion of the savings that they negotiate. Some cost containment firms work with national suppliers that offer steep discounts based on the breadth and purchase volume of their client base.

(Note - Many companies never want to outsource; they think that if someone is going to look at their spending habits it should be only their employees. But in order to return a positive NPV (10% IRR) the company would need to generate cost savings of over $100K annually, over 3 years, with a payback period of 2.4 years based on a $50K salary for an indirect spend buyer. Most often working with a cost reduction consultant makes the most financial sense).

By following these steps mentioned in this article you are sure to benefit not only in terms of actual savings, but your purchasing & negotiating skills will improve during the process.

Alliance Cost Containment is a national expense-reduction advisory firm. With over 40 offices spanning North America, ACC's purchasing aggregation and vendor-management processes provide small and mid-sized business & not-for-profit organizations access to the kind of large corporate purchasing power they are often unable to capture on their own. ACC also facilitates detailed vendor management and reporting processes to make sure our clients capture the savings that we help generate. Established in 1992, ACC has served nearly 800 clients nationwide.

Nancy Stanton is a principal at Alliance Cost Containment. She has extensive background in Budgeting, Category Management, Product Planning and Corporate Financial Planning &Strategy. Prior to joining ACC, Nancy was a Director of Operational Effectiveness for a leading North American consulting firm and VP of Strategy with a top-tier multi-billion dollar retailer. She is a former member of the Professional Pricing Society and an expert in price strategy and price optimization. Nancy obtained her MBA from The Lally School of Management, RPI, Troy NY.