Chris Borrow, Senior Manager for Ayming Operations Performance, explains the benefits of strategic procurement for start-ups.
Only as businesses continue to grow will their procurement functions blossom into maturity, developing an increasingly strategic outlook to match the demands of big business, and beginning to apply an ever-more sophisticated arsenal of value levers.
So, what about procurement in a product-based start-up environment? Where does strategic procurement fit? Is there even a place for it? And is it possible for these businesses to access the most beneficial value levers with little-to-no volume leverage or bargaining power with suppliers?
Perversely, while they are often overlooked, it could be argued that procurement value levers are far more important to product-based start-up environments than big businesses.
Cost margins in big business are often obscured and cushioned by scale, with the distance between the top and bottom line determined by a complex array of cost and revenue variables.
Conversely, product-based start-ups live and die by their margins. With the market normally dictating what can reasonably be charged for a product, the ability to achieve the minimal possible cost has a profound impact on profitability.
But, without volume leverage, and with close-to-zero negotiating power with suppliers, what levers can a product-based start-up actually put to work for them? Here are the most critical three:
Lever 1: Cost modelling
Simply put, if you don’t know your costs, then you don’t know what price you need to be selling at, and you certainly don’t know your profit margin. Try taking that situation into an imaginary Dragons’ Den and coming out alive: You won’t.
Establishing a model of your costs that’s as accurate as possible is the critical first step in understanding your product viability and testing your proposed selling price. Does it allow adequate margin? Do you need to re-think your pricing?
Furthermore, your cost model is the foundation upon which all the other levers rely. Without cost transparency and a clear understanding of the cost components of your product, you have no basis for intelligent decision-making.
Lever 2: Cost engineering through specification optimisation
Now that you’ve established a breakdown of your costs, go back and take a closer look at them. Are there costs that could easily be reduced by reviewing your specification?
Does your packaging need to be thick card with a gloss finish painted in glorious technicolour? Do you need to dispatch by next day courier service or would Royal Mail do the job equally well at less than half the cost?
It’s tempting to gold plate your product, but it’s vital to challenge every specification choice with questions like ‘Is it worth the money?’ and ‘Will customers even notice the difference?’
It’s also important to ask, ‘Would this be a false economy?’ where specification reductions are concerned; a question that can be answered by looking at your Total Cost of Ownership (TCO).
Lever 3: Total Cost of Ownership (TCO)
‘False economy’ neatly sums up the fundamental premise underpinning TCO.
Thinner card may be cheaper, but will it result in a shoddy appearance or greater damage rates?
This is a simple example, but where TCO gets really interesting within a product-based business is in the interaction of cost components.
For example, if you’re shipping your product, what about the interaction between product size or weight and the shipping cost? Could you streamline the dimensions of your product or make it lighter to save on the cost of shipping?
Going one step further, could you redesign your packaging to reduce construction time and save on labour costs?
Considering the interaction between the cost components of your product is a key step towards optimising value from top to bottom.
Hopefully this brief review has highlighted that, perhaps counter-intuitively, the strategic cost levers applied in leading procurement functions around the world are equally or more critical in a product-based start-up business.
So, if you’re planning to venture into the Dragons’ Den anytime soon, make sure you’ve done your homework on procurement value levers first, and best of luck doing battle in the lair!