See Also:
Predetermined Overhead Rate
Activity Based Costing vs Traditional Costing
Activity Based Cost Allocation
Standard Cost
Overhead Expense Reduction
As a general precursor to Overhead expense reduction, Group Purchasing Organizations, Co-ops and Consortiums always lead to lower prices because they aggregate spends and create buying power. This may be true for smaller spends but as spends get larger ($100,000+ annually), you will often do better on your own when a supplier can customize a program to your specific purchasing patterns and needs.
Category Specific Expertise
In reducing overhead expenses, expertise in purchasing for one cost category or in the request for proposal process will produce similar results in another cost category. What expertise in purchasing really means is an understanding of the unique data requirements and what drives supplier pricing to achieve the best results. You may use the same process in different categories. But without the category specific information, the results may not be the same at all.
Category specific information includes changes in the industry, contract nuances, and benchmark data.
Stay Loyal to The Supplier
Loyalty to a supplier always translates into the best value for your company (value = price + service) as well as the best opportunity to reduce overhead expenses. Quite often, long time loyalty leads to complacency from both the supplier and the purchaser. Industries and companies change over time and vendors providing operating supplies and services are no exception. Modest price increases year after year may seem acceptable when in reality the market may have changed, and the cost should actually be going down year after year. Compounding increases add up over the years.
How To Reduce Overhead Expenses
There are three things that you can do to reduce overhead expenses:
- Lower Costs with Incumbent Suppliers
- Ask Vendors to Help Manage Spend
- Create a Competitive Environment for Each Category
Lower Costs With Incumbent Suppliers
Ask your incumbent suppliers what you can do that will result in lower costs from them. Lower Cost can lead to a smaller Overhead-Rate which ultimately can lead to a reduction in overhead expenses. Work with your vendor as a team member – not as an adversary. If you can change a process or an ordering habit in your organization that reduces your vendor’s expense, then your vendor should reward you with lower prices which can lead to reduced overhead expenses.
Ask Vendor to Help Manage Spend
Then, ask your vendor to help you manage the spend. A proactive approach must be taken to reduce overhead expense. Are you leveraging the vendor’s platforms for ordering and managing information? Or can they track purchases by department and provide invoices already allocated to departments to ease the work of your Accounting Department? Can they inform you if employees do not follow established business rules (e.g., buy-off contract)? Do they have the technology to prevent your employees from buying off contract without proper approval?
Create Competitive Environment for Each Category
Finally, create a competitive environment for each category. Let your team and vendors know that there are no “sacred cows“. Have someone other than the supplier’s daily contact manage the expense review process. This enables greater objectivity and keeps personal relationships out of the process. Then give suppliers all of the information they need to sharpen their pencils and minimize their risk. The more they know about your usage and requirements, the better. Customers who inspire confidence and minimize the suppliers’ risk are rewarded with the most aggressive pricing. Reducing overhead expense requires an understanding of both your personnel, as well as the vendor’s.
When you know your overhead and how much you need to reduce it by, you can add real value to your organization.
Originally posted by Jim Wilkinson on July 24, 2013.
