Adrian Turner, European head corporate procurement, Apple, UK
I have been intrigued by recent discussions around cost cutting and why we, the procurement profession, never seem to get past it as our main
raison d’être.
Some of the discussion may be to do with the simplicity of the question. If you ask business executives a simple straightforward question, such as what is the number one focus this year, we should not be surprised when we get a one-dimensional answer. However, peeling away the layers reveals disappointment in the profession at having to admit cost cutting is the focus. The unspoken question is: is this all business really want us for? But does cost cutting really have such a negative connotation?
I suspect, at the heart of this is the idea that somehow tactical is bad, inefficient or ineffective. On the other hand, strategic is good, effective and admirable. But cost cutting is just a tactical response. I feel that we might be shying away from our professional heritage too quickly. I have been in many board meetings where cost cutting is firmly on the agenda and is clearly part of the strategic objectives of a company. So why this dichotomy between the importance of cost cutting and our angst at it being our professional purpose?
As a profession we have a long corporate heritage. The term purchasing can be found in the railway industry, as far back as the late 1800s. Harvard was offering courses in purchasing in
1917 – so as a profession we have been around for a while. Still, up until the 60s, purchasing was basically an order-placing clerical role holding a staff-support position. It may be this picture of corporate history that we wish to shy away from.
Obviously, corporate life has moved on since the 60s, as has the need to communicate our corporate role. The procurement professional needs to both understand the importance of cost cutting and how to communicate the results, to show the impact of procurement on the company. I have sat in too many meetings where procurement people have talked “procurement” and not “business”.
Cost cutting has many different facets. Perhaps the most succinct way these facets have been expressed is in the familiar seven areas of excess and waste – avoidance, reduction, reuse, recycle, recover, treat or dispose. Excess and waste needs to be trimmed, and it is in looking for improved ways to do this that gives procurement its strategic position. There is, however, the need to create the frame of reference for procurement’s strategic position – at its most fundamental the language of gross and operating margin.
Procurement is a management discipline and profession that seeks, by drawing together the entire supply chain with strategic thinking, to develop a broad alignment of purchasing activities with organisational objectives. I think we need to be more specific about this and provide the direct links. We also need to be able to communicate this in a way that makes business sense using business language. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Meanwhile, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on price. If it can’t make up for this problem by cutting costs, then the business faces a bleak outlook.
We do need to close the gap between business decisions that are rooted in cost cutting and purchasing performance. We need to engage in the
lingua franca that sells the success of what we do and who we are. As a profession let’s embrace cost cutting, but with all its facets – it is what we do best. It is our heritage.
Jos van de Sanden, supply management and supply chain specialist, BMK Consultancy, The Netherlands
That is our job, that is what we are hired for. It sounds old fashioned, but each time you want to bring about change you have to understand one thing – that management only wants to see costs go down. In particular when the business is growing, then the focus is on cost cutting. Why? Because the stockholders (which include us) expect the company to make money and don’t want to lag behind other companies.
My motto is: “In good times the focus should be on purchasing and in bad times on sales.” But purchasing should be ready for when the bad times come round again.
Andrew Little, head of procurement and logistics at AGR Field Operations, Australia
Procurement is about cost improving, the basic concept being: “I used to pay $1 now I pay 90 cents – a saving.” However, also correct is: “I used to pay $1 and now I am paying $1.10, but it lasts a third longer, so again a saving.”
I have been on both sides of the fence as well as a GM looking to reduce my costs, so I do know some of the myths or traps young procurement people fall into. Good procurement strategy will highlight savings, whether direct or indirect.
Eamonn Phillipson, head of procurement at Sequans Communications, France
There’s nothing “unsophisticated” about how we make our companies more profitable by cost reduction or avoidance. It doesn’t just happen by reducing invoiced prices. In my experience, a holistic approach to reducing TCA&O also drives innovation in the whole supply network.
Being simplistic, how else would you be paying less for more? How is it that your latest Smartphone costs a fraction of the first Motorola “luggables”? I’m generally pretty happy to get more “bang per buck”, provided there is genuine value added for the end customer.
Rod Wood, interim commercial director, Lenta (Russia), UK
Cost cutting always sounds like an unplanned, knee-jerk reaction to a problem whereas I see managing cost as the key role of the procurement function.
Managing cost is achieved through a number of activities, including sourcing, e-auction, negotiation, supplier rationalisation, specification and so forth. The approach to cost should be based on an ongoing strategic plan, which then also includes other important considerations such as risk, security of supply, quality and product development. In this manner, cost cutting really is a tactical need to support a short-term problem as opposed to a longer-term planned approach to managing cost.
Clive Dedman, head of procurement at Telereal Trillium, UK
We are being judged on cost savings but classic procurement says that quality is the first consideration. Life cycle or “fit for purpose” has to be considered and it is important to make stakeholders understand that this is all part of the cost-cutting agenda. I agree it is very hard to get this message understood – there is a deep lack of understanding.
If you ask most CEOs about their requirements from the procurement function, reducing costs will be pretty high up on the list. Achieving that while maintaining supplies and by encouraging innovation from the supply base is key. Cost cutting can sound very short term and transactional and it can be, but it is also about the development and successful delivery of process innovation, product innovation and constructive contracting, among other things. For example, making the total cost pie smaller rather than just trying to take a bigger slice of it.
Tim Carter, owner/director, Carters Procurement Services, UK
We should embrace the requirement for us to drive cost out since that is what we are paid to do. This does not have to be at the expense of quality or value for money or robust contracts and is a continual review cycle to stay on top of the market. One of the most enjoyable procurement activities is achieving a negotiation result that is good for your company, for your client or stakeholder and for yourself. It is intrinsic to our value and will always be, but we must ensure that our stakeholders understand that this is only one component of a total procurement added-value package.
Jonathan Watt, former CPO and now executive consultant at State of Flux, UK
We have all lived under year-on-year savings targets. Where an industry has fat it needs to be aggressively trimmed, but have things changed?
You get what you measure, is the old adage. It highlights that if what you want is year-on-year savings your internal organisation and your suppliers will align with this metric for better
or worse.
There are two problems I have here, which have given supply chain and procurement a tarnished image in the eyes of the CEO/CFO: first, compliance in the supply chain is poor in most companies. Aberdeen Group indicates there is up to 35 per cent non-compliance in supply chain transactions. However, savings do not all hit the P&L, which in turn leads to lack of trust and sandbagging of savings targets from buyer to CPO. Second, behaviours change in the supply base and with buyers to encourage higher initial prices with the necessary year-on-year reductions built in.
My view is that CPOs need to focus on compliance across all processes especially competitive tendering and contract management, plus metrics that demonstrate this discipline.
Willem F van Oppen, owner, Provoque Consulting, The Netherlands
As long as companies only play to shareholder value and its myopic dynamics, procurement will not be able to successfully drive a strategic agenda of value sourcing, instead of cost cutting.
There are other stakeholders important for a company, not just shareholders, who have a different viewpoint, such as customers, employees and partners.
Moreover, I do not see many CPOs being able to make value sourcing transparent and measurable. It is the typical struggle between what is short-term, easy-to-measure reduction of external cost, and the more sophisticated, difficult-to-measure goal of supply chain optimisation and reduction of waste and cost of poor quality. The latter can be made measurable, but requires strong collaboration between procurement and the business. Yet that is often lacking, since procurement is seen as a corporate savings machine that reports to the CFO.
My motto is: “Focus on cost, quality goes down; focus on quality, cost goes down.”
