Improvement in Gross Margins by Transforming Purchase Processes

Sustaining business development and profitability in the highly competitive service market requires maintaining strong gross margins. The global procurement software market, valued at $6.5 billion in 2021, is expected to grow at a CAGR of 10.9% from 2021 to 2029, emphasizing the importance of efficient purchase processes in today's business environment.* This case study explores a service client's challenges in the technology domain whose profitability declined despite increased sales and economies of scale.

The client's purchase processes were fraught with inflated costs, a lack of vendor expertise, and a mockery of the quoting process, all contributing to a significant decrease in gross margins. CFO Bridge was brought on board to analyze the situation thoroughly and implement strategic measures to transform the purchase processes and improve gross margins. This case study delves into the observations and approach taken by CFO Bridge, the challenges faced by the client, and the impactful results achieved through the implemented solutions.

Challenge For CFO Bridge - Why was  Sales Growth Not Aligning with Increased Profitability?

Our client, a well-known service provider, was at a turning point in the fast-paced, competitive service sector, where margins are often thin and customer demands are high.

Discrepancy Between Sales and Profitability

Despite the upward trajectory in sales, the client's profitability was on a downward slope. This discrepancy raised concerns, as conventional wisdom suggests that sales growth and economies of scale should ideally lead to improved profitability.

Client's Proactive Stance

Recognizing the need for intervention, the client reached out to CFO Bridge with a clear mandate: to go deeply into the business operations, identify the reasons behind the declining profitability, and implement strategic measures to bridge the gaps.

CFO Bridge's Expertise

With a proven track record in transforming business processes and improving profitability, CFO Bridge was well-equipped to take on the challenge and provide the client with actionable insights and solutions.

CFO Bridge Strategic Intervention - Holistic Approach to Revamping Purchase Processes

When CFO Bridge stepped in to address the client's declining gross margins, a comprehensive analysis was conducted to pinpoint the root causes. The findings were eye-opening:

The Problems Identified were:

Gross Margin Discrepancy

Despite increasing sales, the client's gross margins had plummeted by 12%, indicating underlying profitability issues.

Inflated Contract Costs and Vendor Monopoly

The analysis revealed that many contracts had inflated costs, and a select few vendors monopolized the contracts, limiting competition and driving up prices.

Lack of Vendor Expertise and Mock Quotation Process

Contracts were being awarded to vendors lacking expertise. Obtaining three quotes was a mere formality, with vendors providing three dummy quotes to meet the requirement.

Vendor Proliferation with New Employees

The purchase department was constantly flooded with new vendors brought in by new employees, further complicating the vendor management process.

In response to these findings, CFO Bridge took the reins and implemented a series of strategic measures:

The Solution by CFO Bridge Team:

Supervision and Sourcing Process Redesign

CFO Bridge was assigned to supervise the entire process and designed a new sourcing process to address the identified issues.

Commercial Function Setup and Segregation of Responsibilities

A commercial function was set up to segregate responsibilities between procurement and commercial functions, ensuring a clear delineation of roles and responsibilities.

Vendor Selection Criteria and Shortlisting

Criteria were established for selecting vendors, and 3-4 vendors were shortlisted for every category, with rate contracts in place to ensure competitive pricing.

Online Orders for Standard Items

Online orders were placed on e-commerce sites for standard items to take advantage of the best rates available.

Implementation of Measures for Vendor Management

A code of conduct was established for suppliers, vendors were consolidated to streamline the process, mandatory processes and purchase orders were implemented for any work, and commercial staff maintained constant interaction with vendors.

Through these strategic interventions, CFO Bridge has laid the groundwork for a more efficient and cost-effective purchase process expected to significantly improve the client's gross margins and overall profitability.

Metrics Achieved by Client - CFO Bridge Strategic Excellence

The strategic interventions implemented by CFO Bridge have yielded significant results, fundamentally transforming the client's purchase processes and gross margins. Here are the key metrics achieved:

Restoration of Gross Margins

Within one year, the client's gross margins were restored to their original levels, resulting in a substantial gain of Rs. 4 Crores. This turnaround is a clear testament to the efficacy of the measures implemented by CFO Bridge.

Assurance to Vendors

The new sourcing process and vendor management measures have provided vendors with clear expectations regarding the business they can anticipate. This clarity has enabled vendors to allocate their best resources to fulfill the client's needs, fostering a mutually beneficial relationship.

Improved Focus by Sourcing and Operations Employees on Project Execution

With the revamped purchase processes, sourcing and operations employees can now concentrate on their core responsibilities related to project executions. The need for these employees to engage in commercial discussions has been significantly reduced, thereby improving efficiency and productivity.

Conclusion 

The case study illustrates the transformative impact of revamping purchase processes on a company's gross margins and overall profitability. CFO Bridge has successfully addressed the client's challenges through strategic interventions and a comprehensive approach, resulting in reinstated gross margins, stronger vendor relationships, and enhanced focus for sourcing and operations employees. 

Are you facing similar challenges with your purchase processes and gross margins? Contact CFO Bridge today and let our team of CFO consultants help you navigate the complexities of purchase processes and achieve your business objectives.