With some forecasters predicting oil at $250/barrel, many businesses are being forced to impose surcharges, cut capacity and reduce staff to cut cost. In fact recently one headline in the New York Times read "Even Vegas Is Down on Its Luck". So what's your cost management strategy?
Economic downturns are typically accompanied by large inventory buildups and cutbacks in orders that cascade down the supply chain, often having a devastating effect on unprepared suppliers. In such a climate businesses large and small cannot afford to simply stand by and do nothing. A typical response might be that sales are good and costs are bad, followed by a financial crackdown, to limit the damage to the company's market capitalization and the level of shareholder dividend payments? In other words, get back to financial basics.
At Purchasing Practice, we don't believe this is the right solution. We believe in a more strategic approach to cost reduction. Some costs are actually good because they are a vital component that drives current and future growth. Cutting these too far or in the wrong places can have catastrophic impact on a business. It is the role of strategic cost management programs to consider all types of cost: good, neutral and bad. This assessment can then be used to target cost more effectively and reinvest any savings back into the business. By taking a more strategic approach, we believe, businesses can actually create opportunities to outmaneuver competitors who carry on with business as usual or are unable to adapt quickly, except by wielding the axe and cutting staff.
How Purchasing Excellence Helps
We know from previous downturns that procurement plays a key role in any cost reduction initiative. At Purchasing Practice we believe procurement leaders must use this opportunity to not only cut cost but also build sustainable competitive advantage. Following is a checklist of considerations to keep in mind as you look to leverage this opportunity.
Know your business
Procurement staff must understand the company's objectives and what's important to the company in order to gain a better understanding of its strategic imperatives and business drivers. Purchasing must take the lead while creating close alignments and alliances with key stakeholders across the company.
Procurement must focus on the issues that are most important to the company. It is no use asking stakeholders, '"How can I help you?'" They might not know! Procurement must lead, and, as successful procurement leaders know, one of the biggest mistakes procurement can make is trying to be all things to all people.
By considering how the wants and needs of stakeholders align with what the organization wants and needs from its stakeholders, procurement can examine its relationship with each stakeholder. Procurement can then assess the strategies, processes and capabilities that are needed in order to satisfy these two critical sets of wants and needs.
The battle for talent
In the end, transforming procurement into a competitive advantage depends on winning the battle for talent.
Procurement talent is in short supply across all sectors, and major organizations globally are finding it a significant challenge to recruit and retain highly skilled, experienced procurement staff. This is a critical consideration as your company examines staffing levels. After all, overzealous cutting can be detrimental to employee morale and increase turnover, sending top performers into the hands of competitors and leaving your organization in a weakened position. In addition, with both the shortage of talent and increased internal financial constraints during a downturn, companies cannot depend on hiring to fill the talent gap; instead, businesses have to develop the skill levels of their existing staff.
- 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.
- 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.
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
Manage Working Capital
Does excellence matter?
Leverage the Power of Technology
- Improved procure to pay processes, resulting in increased compliance with strategic procurement contracts and reduced maverick spending
- Increased spend visibility
- Improved working capital management
- Improved contract management and supplier relationship management, resulting in improved monitoring of the suppliers performance.
Drive Compliance and Track Savings
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