I nearly stabbed myself in my thigh with my pen to make sure I wasn’t dreaming. There I was, sitting in front of the CFO, when he said: “I think we should make our savings definitions easier to hit. I want to start encouraging the right behaviours in this time of insidious inflation. What do you think?” As I spluttered my coffee (cost up 55 per cent) over his polyester carpet tiles (up 44 per cent), I nodded violently and reached for my mobile phone (down 15 per cent) to see if I could record his words before it was too late.
Reflecting after the meeting, I blamed his recent lengthy delay in a US airport lounge. Clearly he had spent too much time in the bookshop reading How To Motivate Your Staff By Making Their Lives A Piece of Cake or maybe Behavioural Management Leadership For The Numerically Transfixed Executive. Whatever he had been reading (or smoking – up
34 per cent) it was powerful stuff.
Having committed, I went off to do some benchmarking (up about 10 per cent). First call was to our biggest competitor. “So, Bob, what are your savings classifications, eh?” I dared asked at a chance meeting. Turns out that Bob has pulled a blinder. While we are held to cash delivery of usage and price variances with allowances made for volume and mix, Bob gets away with including cost avoidance.
So, when Sammy Salesman pops in asking for a 10 per cent increase and Bob’s thrusting buyer beats him down to 5 per cent, that’s a 5 per cent saving! Whereas in our case that’s a 5 per cent cost avoidance (which doesn’t count) and a 5 per cent increase (which does). No bonus for yours truly, but a healthy cheque for Bob. Maybe the grass really is greener…
Next stop, a Very Large Company indeed. Being mates with the Very Important Head of Purchasing has its advantages. Especially when I learn that she gets away with measurement against, wait for it, the… market! That’s right. One of the biggest companies on our planet rewards its purchasing staff with savings against the market price. And, of course, who are the masters of market pricing? Surely, not those very same purchasing pointy heads?
So, this is the market scenario. Billy Buyer is a little under pressure. Sammy Salesman treats him to a meal out (strangely around budgeting time). “We’re under a bit of pressure, you know, I think we’re going to have to come in for an increase,” says Sammy. “We were thinking of 10 per cent. How does that feel?” Ever diligent, Billy pauses for a moment then replies: “Well, if you provide compelling data showing the market rate at about 20 per cent, I’m sure we can do a deal. Is it time for cigars?”
My reckoning makes that a slam dunk 10 per cent raise for Sammy, a 10 per cent saving for Billy, a healthy bonus for the boss, and a very depressed me.
For my last stop, it was on to a veteran of the trade, a chap who’s been buying for more years than I care to mention. Always up with the trends, never behind the zeitgeist of contemporary purchasing practice, his answer was the best yet.
Some years ago, well ahead of the trend, he had his accounts payable function outsourced. A bunch of incredibly capable folks in India took over what had been a veritable industry of paper shuffling in the basement. He also had the wisdom to have the planning and performance management team sent out there as well. The results were staggering.
Not only did the Indians take on the arduous task of receiving, coding, allocating and paying all the bills, they also took over the reporting of variances. Month on month, quarter on quarter, his CFO got a pack from Bangalore giving him crucial measures of his performance. Volume variances. Usage variances. Mix variances. And price variances. Mostly up, but the crucial ones more often down. You guess which.
Then he let it slip. Somewhere along the way, a decision had to be made about where to park sales taxes. “Simple!” said my partner in crime, “It’s a price issue, so we’ll happily absorb that.” Now that’s smart: all savings, however measured, grossed up by 17.5 per cent. “Just don’t tell the CFO,” he said.
Jim Frankley (not his real name) leads a purchasing function in a Fortune Global 500 company. He can be contacted at frankleyspeaking@cpoagenda.com
