While the global economic recovery continues to move forward, procurement professionals remain focused on what they do best: controlling costs. Opinions on how to do it vary widely, as reported from a pulse survey conducted at the ISM’s 96th Annual International
Supply Management Conference in May by Rearden Commerce. Is there really a way for CPOs to tackle it all – and achieve the endgame on lower costs? CPO Agenda asked Henry Hwong
A pulse survey of procurement professionals at ISM reinforced that controlling costs is a top priority. Why is this such a perennial issue?
It’s really driven from the highest levels of most organisations. Whether from the perspective of raising the levels of efficiency, increasing productivity and expanding margins to drive profitability or simply, as has been the case for the past few years, a question of the economy, cutting costs is always on the corporate agenda.
Even when times are good, it’s not uncommon for executive mandates to come across when budgets are being defined that call for a flat 10 per cent cut across the board – it’s simply a way to demonstrate to shareholders that the organisation is maximising resources and managing smartly.
As procurement organisations become the hub for the acquisition of more and more categories of spend – both direct and indirect – these groups bear the responsibility for reducing costs.
When asked where the focus for controlling costs should lie, 32 per cent of respondents said the answer was to have more spending under procurement’s control; 28 per cent said that enterprise-wide visibility into spending was the key to keeping costs down; and 23 per cent thought that putting an end to off-contract purchasing would make the biggest dent. Where should the focus be?
We see the diversity of opinions as a telling illustration of today’s procurement challenge – there are so many opportunities for improving efficiency and lowering costs, but where to begin? For some organisations, it can become a case of frozen by inertia. In others, the focus can swing so hard and far on one area, that the other areas actually spin further and further out of control.
Tackling all three equally may seem like a non-starter. Procurement organisations, like other departments, are smaller, with fewer resources to do more work. But we believe there is a way to drive significant improvement in all three areas by moving towards a more holistic approach to
managing the entire lifecycle of a purchase.
A platform model that supports the entire procure-to-pay process (and as many categories as possible), gives procurement chiefs the one common driver behind all of the strategies reflected in the survey responses: control.
Sixty per cent of procurement professionals surveyed said that consolidating the supply base is critical to controlling cost. But what are some of the consequences of consolidating suppliers? Is this always an effective option?
Supplier consolidation lessens the management burden on procurement – fewer throats to choke, if you will. The most often talked about downside relates to risk, so the smaller your pool of suppliers, the more exposed you are to disruption if one of those suppliers fails or has a quality or delivery issue.
But there’s another consequence when you give users fewer choices. The immediate impact will be an increase in off-contract buying. Expanding the supply base is a counter-intuitive move - but with the right management, working with more suppliers can actually increase compliance and interestingly enough reduce costs, as the procurement team has more leverage to work with when negotiating terms.
What other obstacles does procurement face in controlling costs?
One of the biggest obstacles may, in fact, be cultural. Procurement teams are often not involved in strategic planning decisions and are brought in after major decisions are made, even while their expertise could, in fact, help shape and inform decisions. Even having the information that procurement can provide about supplier choices, costs, and more to fuel the decision-making process could play an important role in keeping costs low in the long-run.
Furthermore, it is important for procurement teams to be able to speak the language of other groups. Often, coming in with a cost-focused approach does not align with groups that may be focused on statutory compliance, like HR, or demand generation, like marketing. Being able to explain how the rigour that procurement brings to the table benefits them in the long run is very important.
How can these be overcome?
This is a topic near and dear to this audience’s heart, of course. When procurement chiefs are viewed by their organisations as a critical contributor to the success of the business and move beyond being tasked with executing cost reductions, the tug of war between aspirations and reality when it comes to cost-cutting will finally end.
What strategies can procurement in organisations that use commodities currently subject to wild price changes adopt?
There’s a perfect example in the category of travel and entertainment: fluctuating fuel costs is causing a great deal of heartburn for procurement teams. Airlines are able to pass on those costs, in the form of surcharges and can, and have, significantly added to the cost of travel budgets. These costs couldn’t have been predicted, nor negotiated away.
It may feel as though there’s nothing that can be done. There are, though, strategies and tactics that can reduce the pressure of the market-driven pricing. Again, in the category of travel and entertainment, an approach that looks at the entire end-to-end cost of a trip, and finds levers outside of those areas where there’s absolutely no room for negotiating, can do a lot to reduce the impact of rising commodity prices.
Ultimately, looking at the total landed cost of a good or service may provide relief from the pressure of commodity fluctuations. It may not exactly lower costs, but we’ve seen it contribute to keeping costs steady, which when things are very unstable can be a major win.
Where do the challenges in procurement lie in the next five years?
One lesson from the past four years has to be that forecasting is for weathermen and economists – and neither is known for successfully predicting short or long-term events.
Still, it’s a good thing to think across a longer time horizon, which in itself may be one of the biggest challenges that procurement organisations will face. The uncertainty about the economy and exactly what shape the recovery will finally take; the surprisingly fast fluctuations in commodity prices; and the lack of demand predictability all add up to a large challenge when it comes to managing or controlling costs.
Beyond the macro-factors, there’s plenty happening within purchasing organisations that will present challenges. As organisations and workers become more mobile, the call for more flexibility in where, how and what is used in the day-to-day amplifies. To my earlier point, that purchasing professionals need to speak the language of the internal customers to drive adoption and acceptance, the purchasing organisation will need to become more responsive to these audiences’ needs.
The logical outcome of those “conversations” will drive a broader set of supplier relationships, building responsiveness and choice into the supply network. Managing this larger network cannot include a larger team; it will require technology – and more specifically technology that moves beyond enterprise-scale, which is today’s gold standard – to web-scale platforms that go beyond the one-to-one relationships that are the focus today. How purchasing will be able to incorporate and leverage relevant and meaningful data that go beyond the four walls of the enterprise into the process will be a key success factor moving forward.
☛ Henry Hwong is VP at Rearden Commerce
