Most companies have already felt the knock-on effects of the financial meltdown of recent months, putting CPOs and their teams under intense pressure to reduce costs and improve cash flow – often with fewer resources – while simultaneously managing an increasingly vulnerable supply base. That’s the main finding of an international survey conducted by CPO Agenda.
Three-quarters of the 103 procurement leaders polled during November have seen their objectives, priorities and/or resources directly affected by the economic downturn. And for those that had yet to feel its impact, almost two-thirds thought it either “likely” or “very likely” they would be during the next six months.
Not surprisingly, the main way that CPOs are expected to help alleviate difficult business conditions is through cost-cutting. Seventy-six per cent of those respondents who had been affected said they were coming under greater pressure to reduce supply costs (see chart 1 below).
“Cost focus is very high on the agenda,” confirms one CPO at an automotive company, based in North America. “We have not gone begging for money, but we have a continuous dialogue with our suppliers regarding cost-effectiveness and we have intense discussions on this right now. It’s always on the agenda and it’s not been diminished with the developments this autumn.”
Falling prices for oil and other commodities have certainly helped, although many companies are restricted in how quickly they can take advantage because they locked in pricing when markets were at higher levels. Indeed, some CPOs have had to answer awkward questions about their hedging and other strategies from senior management in recent weeks.
Others have been more fortunate. One of the few bits of good news lately for General Motors, the stricken US car maker, has been the fact that it has escalator clauses in many contracts that adjust prices on a monthly basis. “We didn’t like it on the way up but now it’s a good thing because it’s totally transparent,” says Bo Andersson, GM’s group vice-president, global purchasing and supply chain, and a member of CPO Agenda’s editorial advisory board.
Against the backdrop of a return to a buyer’s market in some sectors of the global economy, 73 per cent of those affected by the downturn said they had asked suppliers for price cuts in the current quarter. For some in procurement, it’s a welcome opportunity to exact their revenge.
“Those that have increased prices every year, you go back to and play hardball,” says the head of procurement at a US financial services organisation. “Now it’s my turn to say ‘no’ and ask for price reductions and if they won’t then I’ll go somewhere else. But that hasn’t really sunk in for a lot of vendors yet. We’re not far enough into the recession for them to accept that. By next year they’ll be there.”
Bernhard Raschke, a partner in the procurement and supply chain practice at PricewaterhouseCoopers in London, adds: “It’s about re-evaluating your relationships with suppliers who have taken advantage of you in the past. I know of one example where the CPO said to the suppliers that if they wanted any more business they had to pay back some of the increases they had demanded in the past. To some extent, these aggressive measures are expected by the supply base.”
Some are using the economic situation to target cost savings in new categories and get more of their organisation’s spend under management. Almost two-fifths of CPOs said this was one of the main ways they believed they could add value in 2009 (see chart 3 below). “I’m looking to drive a wider expansion on indirect spend,” says Chris Shanahan, vice-president of global procurement at BD (Becton, Dickinson), a New Jersey-based manufacturer of medical devices. “It’s the untouchables: professional services, meetings and some of the facilities area. We probably only see about 10 per cent of that spend but there’s a willingness to look at it now.”
At the US financial services company, “procurement used to be a decentralised function”, says its head of procurement, who asked not to be named, “especially when it came to IT. But just a few weeks ago I was put in charge of centralising everything as a result of maverick spending and not getting discounts.”
Demand management and process re-engineering are other options for reducing costs and improving procurement effectiveness. “Rather than merely challenging specification, it’s looking at how they can achieve a similar output but in a slightly different way,” suggests Mike Zealley, head of procurement transformation at Atos Consulting.
A tricky balancing act
As well as hard savings, the onset of recession has led to a greater focus on cash flow and working capital, according to 55 per cent of CPOs who have been affected so far. GM, which has admitted it could run out of cash by early 2009 and has been forced to ask the US government for billions of dollars in financial aid, has increased its payment terms for indirect materials from 47 days to 60 days. It has also made efforts to reduce its inventory. “With the amount of buying we do, if you can cut inventory by 12 or 20 days it’s a huge improvement of cash flow,” notes Andersson.
“Cash – and cash payment certainty – is king in this environment,” agrees Larry Beard, director of purchasing and supply chain at UK utility company Severn Trent Water. But he is cautious about extending payment terms for suppliers that may be faced with financial troubles of their own. And he sees paying in a timely way as one means of ensuring that his company remains an attractive customer in an ugly economy.
Just over a quarter of respondents said they had offered earlier payment to suppliers in return for discounts. Richard Alderton, director of purchasing and logistics at global dairy equipment manufacturer DeLaval, sees this as gentler way of extracting benefits from the supply base. “It would be tempting to go in and negotiate hard, and we may do that where we think suppliers can cope and they haven’t given us a fair deal in the past,” he says. “But my mindset would probably come down on the side that it’s time to form partnerships and to make sure that suppliers are getting paid on time, so that when the good times come again we can remind them that we looked after them.”
Indeed, balancing pressures to cut costs and improve cash flow on the one hand with measures to ensure the continued health of key suppliers on the other is arguably one of the greatest challenges now facing CPOs and their departments. In the current quarter, 72 per cent of those hit by the downturn said they had monitored suppliers’ businesses more closely, making it the biggest issue after price-cutting requests. And among those unscathed so far, 88 per cent expected to have to pay more attention to this in the next two quarters (see chart 2 above).
Almost seven out of 10 respondents said they were either “concerned” or “very concerned” about the prospect of key suppliers failing during this period. And a fifth of those affected to date had already witnessed the bankruptcy of at least one key supplier.
One of the things Shanahan’s team at BD is doing is working with accounts payable to keep tabs on any suppliers that request early payment – one of the warning signs that they may be in trouble (for more on this topic, see Tactics article). Overall, more than two-thirds of the CPOs surveyed believe that identifying suppliers at risk and improving security of supply is the most significant area in which procurement will be able to add value in 2009.
“The most important thing for us and other buyers is to stay very connected to the market,” says GM’s Andersson. “Our supplier quality team visits approximately 250 suppliers on a daily basis. The standardised process that we follow allows all of us to fairly accurately determine if a supplier is financially healthy or not. These are challenging times and we do our best to have accurate data, but sometimes we get surprised, both positively and negatively.”
Dealing with adversity
Faced with a more unstable supplier landscape, there are a number of strategies CPOs can deploy. One is to minimise their exposure to suppliers they think could be headed for trouble. More than half of those polled said they had reduced the number of single-source arrangements, while 38 per cent had switched business to more stable suppliers and a similar proportion were changing specifications to widen their supply options.
“Wherever possible we’re trying to dual-source on key risk areas,” says Severn Trent’s Beard. “To be able to sleep at night you’ve got to put a few things in place. And this time around we’re actually dual-sourcing in low-cost countries. Before it was just a case of finding a second supplier in the UK.”
Another option is to provide direct financial assistance to keep a supplier in business – which almost a fifth of respondents had already done. One CPO said his firm had bought raw materials for one of its two failed suppliers, while the CPO of a healthcare company, who did not wish to be named, said he had put aside money specifically for this purpose, although he had not yet had to draw on it.
“I’d rather help the suppliers early on than spend a lot of money on bankruptcy lawyers,” says Andersson. “But in the US we still have a lot of suppliers that have the same issues as us: legacy costs and relatively expensive labour contracts. In the end, the supplier needs to be competitive. We can’t throw good money after bad.”
French aerospace company Safran, meanwhile, has joined forces with the French government and big customer Airbus to provide financial assistance to suppliers through an investment fund. “We know very well which key suppliers are efficient and aligned with our own strategy and we can say what part of their business plan is supported by our own spend. This is of a great value for a fund,” says Laurent Jehanin, Safran’s group vice-president of procurement.
The company has also helped some of its smaller suppliers by advising them how to access government assistance money. Some simply don’t have the people or expertise to know how to apply for these grants, he explains.
A more extreme step to ensure security of supply is to acquire a failing supplier, although only two CPOs in the survey said their companies had done this in the current quarter. “I’ve recommended to group management that we consider acquisition of a supplier for however long this crisis lasts if it ensures security of supply,” says DeLaval’s Alderton.
Of course, one way to make savings and help suppliers is to engage in joint cost-reduction initiatives. Almost half of respondents hit by the downturn said they were either starting these afresh or accelerating those already under way, while 62 per cent of all respondents saw this as a priority in 2009.
“We’ve just signed up a new meetings and events provider and we’re having discussions around a clause that would incentivise it to bring savings to the table,” says Greg Tennyson, vice-president of global procurement and travel at Salesforce.com, a software provider based in San Francisco. “It would retain a percentage of that as an additional fee.”
Doing more with less
But while CPOs are coming under pressure to deliver, many are being expected to do this with fewer resources. Our survey showed this is most likely to take the form of budget cuts in discretionary spend such as travel and training, cited by 68 per cent, while 58 per cent had seen investment decisions in areas such as technology or consultancy projects delayed (see chart 4 below). “Procurement managers will be asked to skip or postpone projects that are nice to have but not absolutely necessary and to focus more over the next 24 months on cost reduction,” says Hugo Eckseler, CPO at Deutsche Post World Net.
The economic crisis has also directly affected staffing levels. Just over a quarter of respondents who had been affected had been forced to make staff redundant and 60 per cent reported a freeze on hiring new staff. “We have vacancies at the moment that have been signed off for me to hire but now I’m being told I have to reapply,” says Richard Alderton. “We haven’t got a headcount freeze but we do have a brisk chill. Every head has to be signed off by group management.”
If there is a positive side to the current situation, it is the opportunities it gives procurement to enhance its profile within the business – something that 97 per cent of CPOs felt was on offer. The feeling at a seminar of senior purchasing professionals from around the world, held by the Chartered Institute of Purchasing and Supply in London in November, was that the function could take the lead in executing strategies to survive recession, and that the downturn would force organisations to make tough decisions that could only benefit procurement in the long run.
The shortage of talented people is one area of potential gain.
“It could be a good opportunity to hire other people who have been let go from somewhere else, at a cheaper price,” says the head of procurement at the US financial services organisation. “And that means that when the upturn comes we’ll have changed a lot of things that we’d never have been able to change in a good environment.”
But others are less positive. More than a third of CPOs admitted that they were concerned that short-term actions they might have to take now to trim costs might damage longer-term initiatives where procurement planned to deliver greater value, not least in developing more collaborative supplier relationships. Alderton says he was expecting a quieter year in 2009 after three years of record growth when he could finally get round to putting strategic initiatives into action rather than just chasing capacity. “This has left us exposed earlier than we had anticipated,” he says.
Over half of CPOs thought the downturn would last between one and two years, with a further 23 per cent expecting it to last longer than that. The survey also indicated that almost a fifth were concerned about the financial stability of their own organisation during the next 12 months.
The majority of CPOs, however, will welcome a return to a more cost-focused environment, reckons Alex Klein, a vice-president at European procurement consultancy Efficio. It’s simply what they know best. “In the past few years, when they tried to get more strategic they didn’t make that much headway,” he says. “In each economic cycle you should be getting better at cost reduction. The way to win right now is to stand up and say that you’ll drive a major savings programme.”
CASE STUDY:
Driven to the edge
The automotive industry in Europe and the US has perhaps been worst affected by the economic downturn as car buyers are denied access to the cheap credit that has driven the sector in recent years and delay new purchases.
Autoliv is a Swedish developer, manufacturer and supplier of automotive safety systems and has been hit by a combination of falling orders and a struggling supply base. The company is largely able to pass on volume reductions down the supply chain, but the biggest worry for Halvar Jonzon, group vice-president of purchasing and supply base management, is the threat of suppliers going out of business. He has already seen some go into Chapter 11 bankruptcy and liquidation, and expects more to follow over the coming year.
The business is single-sourced on a number of key parts, so is now allocating more resources to monitoring those suppliers’ performance. “If they’re slow it’s an indicator that management attention is on something other than the operational side of the business,” says Jonzon.
“We also check up occasionally how suppliers treat their own payables. If suppliers are late paying their bills it’s an indication that things are going out of proportion somewhere.”
Jonzon is also making provisions to provide financial support to key suppliers that are threatened with bankruptcy. “It’s certainly not a part of our strategic direction,” he says. “It’s very, very exceptional but it is happening.”
SOUNDBITES:
What CPOs are saying
“The recruitment freeze is the main impact as we seek to make improvements with fewer staff. I have lost 11 per cent of my staff and the workload has increased by 6 per cent.”
Head of supply management
Travel and leisure, UK
“There is pressure to reduce costs at all levels.”
Head of global procurement and sourcing
Financial services, US
“We expect that investments, especially in the Western world, will be postponed for some time. This is nothing new but what worries us this time is that this postponement could happen in parallel in different countries at the same time.”
Director, strategic procurement
Pharmaceuticals/healthcare, China
“The current climate provides an excellent opportunity for procurement to take a leading role in business improvement projects.”
Regional manager, procurement
Manufacturing, Australia
“There is a real sense within the supplier base that the economic situation will reach its nadir around middle or third quarter of 2009. Consequently, suppliers are preparing now for significant reductions in demand.”
Head of procurement
IT/telecoms, UK
Nick Martindale (nick.martindale@cpoagenda.com) is deputy editor of CPO Agenda
