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ERC Today
Sit back and relax. Hiring an Expense Reduction Company can free up your time to concentrate on your core business - while saving you time and money. |
It is 7:00 a.m. and Tom, the CFO at Auto Doors, Inc. sits down with his cup of coffee to begin developing cost reduction goals for the next year.
Auto Doors, Inc. manufactures doors for the automobile industry and is considered the leader in this market. Tom knows what expense categories he needs to focus on to make the greatest impact for his organization. Steel, electrical, door components and finishing materials are the spend categories that Tom and his purchasing department will focus on this year, just like last.
While Tom is analyzing all of last years expense categories, he notices categories that are small but when combined add up to thousands of dollars. Tom makes a call to Ben, the purchasing manager at Auto Doors, Inc. and asks him to come into his office.
When Ben arrives, Tom states, "Ben I need your ideas on something. I have been analyzing our total spend and we have to continue to focus on our core spend categories. But as I dig a little deeper into our spend, there are literally thousands of dollars here that we simply do not have time to concentrate on."
"What we need is an expert in these particular categories, someone who focuses on these categories daily to help us reduce our costs."
Ben investigates some of the categories that Tom is reviewing. Some of the categories that are in question are printed materials, office supplies, telecommunications, packaging materials, and payroll services.
"Tom", Ben exclaims, "You are absolutely right. There are too many dollars here for us to ignore, but there are not enough dollars here for us to spend a lot of time on. What we need is an expert in these particular categories, someone who focuses on these categories daily to help us reduce our costs."
Tom ponders Ben's idea and states, "I think you are right Ben. These categories are a perfect fit for outsourcing. If we outsource these spend categories we can add capacity to the department and cover virtually all of our spend for the entire year. Ben, can you investigate what companies are out there that specialize in these overhead type expenses? We'll meet next week and talk about the results of your investigation." "All right Tom, I will begin looking immediately," Ben says as he leaves Tom's office.
How many times in the last five years has your organization's overhead expenses been under purchasing's microscope? Not much, huh? Let's face it, many organizations today simply do not have the time or the resources to dedicate to these expense categories. Most often they are inadvertently pushed aside due to the more important higher dollar categories.
Help has arrived for organizations that do not have the time, resources and expertise to focus on overhead expense categories.
Introducing the Expense Reduction industry. Expense Reduction (ER) companies are procurement outsourcing firms that are experts in overhead expense categories. Usually these companies employ a primary ER specialist, who is often the owner of the company, and a group of specialists or sub-contractors for specific expense categories. All expense categories are usually managed by former purchasing professionals with extensive experience relative to a particular expense category.
Most often, work performed by these companies is performed on a contingency basis.
What this means is that if the ER company does not save your organization money, then no fees are charged. Revenues generated by ER companies come from sharing the savings with your organization over a specified period of time. This varies between two and five years. The percentage of savings shared is often fifty percent and higher. There are never any out-of-pocket costs to your organization because all fees come out of the savings generated. ER companies offer purchasing departments and their organization the ability to focus on reducing the costs of overhead expenditures thereby allowing the organization to concentrate on its core business activities.
Before hiring any ER company, make sure to check references. Questions to ask the ER company are as follows:
- How extensive is your purchasing and negotiating background? How long have you or your franchisor been in business?
- What is your relationship with your sub-contractors?
- What type of negotiating tactics do you employ? (remember your organization is being represented by this company)
- How will benchmarking be done? How will savings be tracked?
- What are your terms? (length of time savings are shared, invoicing)
After you select the ER company, specify to them which expense categories you want them to focus on. Exchange current supplier information, current pricing and quality/service issues. A good ER company will proceed with the task at hand without having to be managed. You should not be interrupted by the ER company until they are ready to present to you their cost savings plan.
The cost savings plan is a summation of the cost reductions that the ER company was able to achieve from negotiations with your suppliers. This can be in the form of credits from a utility company or hard cost reductions in office supplies, telecommunications and MRO supplies. Your organization should be given the right to choose which portions of the plan to implement. Your organization then shares in the savings over a specified period of time with the ER company. Make certain that you implement everything that benefits your organization. You can not implement parts of the plan after the fact.
ER companies are an excellent resource for organizations that are lacking the capacity and the expertise to review overhead expense categories. Your organization will benefit through cost reductions in expense categories that are not reviewed on a regular basis.
Outsourcing these categories is a proven alternative in this era of lean purchasing departments and cost conscience organizations.
View More Expense Reduction Consulting Franchise Information
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