Managing Through a Downturn

A guide for CEOs, CFOs and supply management leaders on surviving the tough times though Procurement Excellence


  • Invest in Training — One lesson from the 1990s downturn is the threat to staff morale caused by layoffs and redundancies among the remaining employees. This syndrome is often called "survivor guilt," and those survivors are often less productive and preoccupied with the short term. Consequently, their behavior becomes highly risk averse, and innovation is stifled. Surveys have found, however, that companies that increased their training after announcing layoffs were twice as likely to report improved profits and productivity as the firms that did not invest in expanded training. Training and development recognize and value employees, and help survivors move on and respond to the new environment.
  • Review the staffing mix — World-class procurement executives build organizations that have a much more strategic staffing mix than typical companies. According to past research from Hackett, world-class procurement executives build organizations with 63 percent fewer clerical staff and 31 percent more professionals. The staffing model plays a key role in enabling world-class procurement organizations to perform very differently than typical companies. World-class procurement organizations spend 20 percent less on operations than peers and have about half of the overall staff.

Suppliers



  • Collaborate for success — In order to benefit from collaboration, it must be managed both effectively and selectively. The wrong approach to collaboration may increase costs instead of cutting them, create confusion instead of clarity and drive suppliers away.Examples of collaboration include joint training and development in such areas as Lean processes, data analysis, common systems and aligned metrics. Cost reduction targets, warranty claim reduction and continuous improvement activities.Collaboration requires sharing information freely and transforming this information into knowledge, and then creating value from that knowledge. The ability to create value from knowledge depends on relationships.
  • Supplier Relationship Management — Profitability and efficiency is increasingly being driven by good supplier relationship management, working closely with suppliers to achieve corporate objectives. Managing supplier relationships is vital because it allows companies to create value from their intangible assets. Strong supplier relationships can also help drive innovation as it is often the supplier that can identify opportunities for improving processes or providing new materials.For the buying organization, the purpose of investing time in a relationship with a supplier is to ensure that the supplier always operates at peak performance, or if it hasn't been performing satisfactorily, to instigate improvement measures.Supplier relationships can be categorized depending upon their strategic importance to the organization. This then sets a clear framework by which to determine the appropriate intensity of the relationship and how much time and resource should be committed to managing the relationship. A relationship, for example, could be deliberately kept at a distance but still remain good; this could be because it is deemed that there will be no immediate business benefit from having a closer relationship. This could be the case when the goods or services being supplied are relatively low value, infrequently required and pose very little risk to the organization should the security of that supply ever break down. Moving to the other extreme are the long-term close relationships that may be operated as a partnership. This will often be the case when items are high risk, high value and critical to maintaining the organizations operations. (For more on this, visit the Buying Magician Blog at www.purchasingpractice.com/blog to read "Building the Foundations for Preferential Treatment from your Suppliers.")
  • Examine supplier finances — A general economic downturn may put some of your suppliers at risk of financial problems. A review of the financial condition of all key suppliers should be conducted, along with closer monitoring of the financial status of these suppliers through the downturn.
  • Renegotiate contracts — A downturn in your business will reduce your requirements for goods or services. Review your volume commitments to suppliers under longer-term agreements, especially take-or-pay type agreements, and be proactive in discussing changing requirements with suppliers. Also, be alert to potential changes in inflation when drawing up contracts.Working with suppliers to mitigate risks and insulate against the negative impact of a downturn helps everyone. Share the pain to survive, get serious discussions moving with critical suppliers to share risks and rewards, reduce cost and improve efficiencies in a downturn as well as to prepare for the next growth phase.

Strategies

Manage Your Cost Structure and External Spending



  • Cutting costs in areas critical to future growth and success
  • Eliminating costs without addressing root cause issues, such as inefficient business processes
  • Cost cutting decisions based on assumptions rather than fact based data.


Strategic Cost Management Strategies in Procurement





Launch a Strategic Sourcing Initiative
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