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Dec 04

Saving money with the ‘Z-Principle’

The Z Principal

Three easy ways to save money

When CharityLabs Analytics (CL Analytics), the business end of this blog, sets out to do a procurement review, one of the first things we look at is unit costs.

This, as we say, is generally what people first think of when they want to saving money. And they’re right! It’s the cost of the bits-and-bobs you use to ensure the smooth running of your office. Everything from paper and pens to toner and tape! This is officially called your ‘indirect procurement’.

It’s not the only part we look at, of course. But we are not going into Resource Matching and Forward Efficiencies just here.

 

 

One of the best ways at looking at how to save on unit costs is what we call the ‘Z-principle’, and you can use this to a certain extent yourselves to help save money.

It’s called the ‘Z-Principle’ because it has three aspects, forward volumes, breadth of volumes, and lowering transaction costs.

 

Just tilt the screen and squint a bit…

 

Which, diagrammatically (and with a bit of imagination) looks like a Z.

 

Forward Volumes

 

The first aspect is to think volumes. This, of course, is closely related to how much storage capacity you have, and how you allocate the most effective use of it. It can be a complicated working this out, but the simplest way is to work out where most of your capital goes in unit costs, and dividing this by the volume it takes store (or rate of use), and then factor in factors such as use-by dates and so on. But in a small office, a healthy dose of common sense should suffice!

So, once you have an idea of your maximum storage capacity, you can look at leveraging your forward volumes. Essentially, this is using bulk buying to get the best deal that your storage capacity can cope with.

It’s important, as we mentioned previously, that you don’t state the full volume you are seeking in the first step of negotiation. In fact, it’s probably wise not to state it at all in the first conversation you have with a potential supplier.

You can seek price reductions later by stating that you are looking for unit cost reductions for higher volumes, or other extras such as free delivery and the like.

So that’s the forward part at the top of the Z.

Next, the downward stroke –

 

Breadth of Volumes

 

This is trickier for a single organisation. If you have multiple locations, purchasing contracts should be organised centrally, giving you leverage with the ‘breadth’ of volume for better prices. Again, this will depend on your storage capacities at different locations, as well as organising extra delivery routes, monitoring stock control and usage, and working out your contingency plans. Contingency plans should include lead time (how long it takes from identifying need to delivery), storage capacity, and unit usage fluctuations (i.e. that conference you have in two months – how much extra ink, paper etc. is that going to use up?)

As with forward volumes, keep your cards close to your chest – get the unit costs and then seek the advantage of increasing volumes.

The final part of the ‘Z Principle’ is a negative – the backward stroke:

 

Reducing Transaction Costs

 

There are two main aspects with this.

Firstly, many suppliers offer discounts for electronic booking, often for using secure credit card (of which there are other advantages)  payments via a website. It’s simple – it takes man hours out of the process and reduces their expenditure and costs per order. The other way to achieve it, where possible, is to offer regular standing payments or pay for an entire year’s worth of inventory up front, though clearly this depends on your storage and capital position.

Finally, seek to reduce your own transaction costs, by reducing the ‘internal lead time’ (how long it takes to get authorisation) to finding ways to cut out errors

Using any of these three aspects of the ‘Z-Principle’ will help you save your organisation money. And remember, you can always get in contact with CL Analytics who are experts and using the ‘Z-principle’ as just one of the ways they guarantee to help you run your office more economically.