Q: We hear a lot about the recession providing a great opportunity for procurement to prove itself. But what exactly should it be doing?
A: The obvious answer is to cut costs at a time when company leaders are hungry to do so. The cost-cutting prize is a big one, but if this is all you’re going for, it perpetuates the image of procurement as an isolated functional activity dealing with the supply market consequences of other people’s business decisions. It also assumes that a supply market exists and that all you have to do is exert muscle power to get what you want.
A CEO recently said he was “anti-costs”. He clarified this by saying what he really abhorred was wasted costs: a big difference. Incurring costs with suppliers is part of a positive trade to obtain the responses necessary to be in business in the first place. These costs are the precursors of revenue generation. If there is waste in the cost-making process then this damages profit or, in the public sector, busts the budget.
In many companies, procurement philosophy is still running way ahead of procurement practice. Great ideas abound within the procurement community but budget-holding colleagues are still at first base in understanding the part they play to ensure that supply costs are waste-free. Fragmented deals, over-specification, commercially naive behaviour, and poor or hostile supplier performance are still common as waste-generation culprits.
By all means go for immediate cost cuts so long as they are enlightened ones. But do a deal with your CFO or CEO along the lines that for every cost saving you can deliver to them they must, “as part of the deal”, advocate driving an equivalent supply-related cost out of the system and support you in doing so. If this requires some autocracy from the top before colleagues collaborate with you, then so be it. The need is to change mindsets, and sometimes procurement’s licence, so that it becomes embedded as a cross-company process concerned with much more than “just” saving cost.
The good news is that procurement can shine brightly on your CEO’s or CFO’s radar while the recession runs for the next 12-18 months. The bad news is that the cost savings that procurement folk can make on their own dry up by then. Other than “out”, you’ll have nowhere to go if you have not by this time established procurement as an activity with which everyone in the company is on side. It has to be if you want a procurement process that is not only demonstrably waste-free but also able to maximise the return on costs invested in the supply side of the business.
Q: Some of our suppliers are SMEs. How might we advise their management teams about avoiding supply-related pitfalls in the immediate future?
A: Before answering this question, let’s assume your suppliers are already doing certain things: have a good analysis of their supply expenditure, treat critical suppliers as partners rather than protagonists, and have effective internal processes for making contracts and paying suppliers.
With these provisos, the priorities are to ensure that supplies keep coming down the supply chain and to secure latent cost savings.
Include the following in your advice to the SMEs:
Following this theme, if an SME is contemplating using a supplier over the next 12-18 months, negotiate a price agreement (but not a commitment to buy) based on the total volume expected, then release smaller purchase orders as materials are required. This staggers invoices and optimises cash flow as well as eliminating static stock.
Increase the size of orders from suppliers by joint purchasing with other companies. Alternatively, if an SME is using two or more subcontractors engaged in similar work but buying separately from the same raw material sources, negotiate more favourable prices from these sources and direct the contractors to use them.
Dr Richard Russill (www.russill.com) is a business adviser and writer, specialising in supply, cost and relationship management
