How to identify savings opportunities: Renegotiation

Procurement analytics comes in many shapes and forms. Let us take a look at some analyses that you can use for identifying renegotiation opportunities.

PS. In case you need a refresher of what spend and procurement analytics is, take a look at this article.

Reducing Costs by Renegotiating Existing Contract Terms

At Ignite Procurement, we apply a framework containing eight strategic procurement measures (or levers) for driving cost reductions and spend optimization. One such commercial lever is to renegotiate existing contracts and terms with your suppliers.

A renegotiation process has multiple benefits if done correctly. One of the key benefits is a high return on investment (ROI) as a result of being resource-light relative to realized savings.

But how do you identify potential renegotiation opportunities across your business? And what types of analyzes could you utilize? Let's look at some examples for driving these insights.

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Spend Data Insights

Easily accessible spend data is a must-have for all procurement professionals. If not, you and your business should make this a number one priority as you're probably managing your spend blindly. Please note that more granular spend data, such as item-level data, can provide you with more detailed insights if available.

Spend Growth by Suppliers

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In the analysis above, we take a closer look at the overall spend development by suppliers. The Y-axis shows supplier names, and the X-axis shows spend growth in % measured by CAGR (Compound Annual Growth Rate).

All other things being equal, a higher CAGR may indicate better opportunities for renegotiating the terms with your suppliers. Your bargaining power is probably better when presenting a growth scenario, especially if the actual purchasing volumes are higher than at the contract's inception.

Spend by Suppliers and Departments (or Similar)

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This example shows us spend distribution by suppliers across the organization where we use departments as the applicable data parameter. Departments could easily be substituted, or enriched, by using other available data points for your business, such as business units or group companies.

In addition to providing insight into bundling opportunities, the analysis also highlights possibilities for renegotiating your existing contract terms. Consolidating spend and volumes across your business will, all other things being equal, boost your bargaining power towards the suppliers.

Weighted Price Changes by Items

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If your company has item-level spend data available, it's usually highly relevant to analyze price development for the products and services you buy. In the example above, we look at volume weighted price changes (the blue bars) by item, sorted by total spend (the grey line).

Analytics showcasing price trends helps you identify large price increases across the products or services you buy. These insights are crucial for high-volume items, or items where volumes are increasing. If prices unexpectedly spiral and can't be justified by the supplier, you probably have a strong case for renegotiating your current terms.

Spend Data Combined With External Data Sources

Combining your spend data with external data sources gives you additional perspectives. Let's take a closer look at how your suppliers' financial information provides valuable insights on renegotiation opportunities.

Share of Wallet and Supplier Profitability

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This example, also known as the "Ignite Matrix", analyzes your share of the supplier's revenue (X-axis) combined with the supplier's profitability (Y-axis). Each blue dot represents a supplier.

A large share of wallet explicitly highlights your importance as a customer - and your bargaining power. If the supplier also enjoys healthy margins, you may want to ask yourself; Is our collaboration well balanced? All else being equal, you're more equipped to renegotiate with suppliers dependent on you and who benefit from higher profitability.

Disclaimer. The insights provided above are merely indications and don't always give you the full picture. For example, you might want to validate the analyzes with qualitative and other relevant insights, such as existing contractual terms.

Introduction

How to identify savings opportunities: Renegotiation

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