How To Improve Profitability by Managing Third-Party Spend

Profitability is the goal of every business. For companies to achieve this, they invest in marketing and sales to increase turnover, which results in increased profitability.

There is another way to increase profitability, and that is by managing the spend of third-party suppliers. In addition to saving money, companies can also save valuable time and improve their offering to their own clients by actively managing this spending.

It is estimated that 70% of a company’s revenue is spent with third parties, and that effective management of third party spend can result in savings of between 7 and 12%, improving the bottom line (Strategic cost reduction through procurement – PwC, 2014).

 As an example:

Company A has annual turnover of £2.1 million and third-party supplier spend of £1.5 million.

Actively managing the spend delivers annual savings of between £100,000 and £180,000

Controlling and monitoring supplier spend can significantly improve a company’s profitability. Cost savings may appear to be less significant than sales revenues over the same period, but they can have an equally powerful impact on a company’s profitability. This impact is directly related to the sales margin.

 As an example:

If Company A (above) has a sales margin of 5%, this generates £105,000 in profits

or

If company A has a sales margin of 10% this generates £210,000 in profits

Actively managing third-party supplier spend can significantly increase a company’s profitability. Companies who wish to do this effectively either need to develop the processes themselves or invest in eProcurement software to manage the supplier contracts and the suppliers themselves.

It is imperative that companies evaluate the features of each eProcurement software product and calculate the Return on Investment to make sure they are receiving the most value for their money.

Large companies can choose from a variety of eProcurement platforms, each with its own advantages. SMEs with fewer resources can easily manage the spending from third-party suppliers with the use of an eProcurement Software. oboloo is a self-service solution that combines sourcing, contract management, suppliers and savings management in one software application that helps companies become supplier-smart. For more information, visit www.oboloo.com.

 

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