Economy
Turning the corner
The focus for procurement is still on reducing costs and monitoring supplier health, but there are signs that the worst effects of the recession may be over
Procurement departments are still wrestling with the challenges of cutting costs and maintaining supplier viability but there is growing confidence that the worst of the economic recession is over.
CPO Agenda’s latest economic climate survey polled 60 CPOs and senior procurement professionals around the globe in November 2009, following two similar pieces of research in May 2009 and November 2008.
This time around, 89 per cent of respondents said they were under pressure to cut supply costs, with 60 per cent reporting a greater emphasis on improving cash flow and working capital, and 54 per cent looking more closely at the financial health of key suppliers than would usually be the case (see chart 1). These figures were all down from the levels recorded in May, however, which stood at 93 per cent, 75 per cent and 76 per cent respectively.
Chart 1: In what ways have your function's objectives/priorities been affected?
The economic climate is continuing to put pressure on procurement to make savings with fewer resources, although there are signs that this is easing. Sixty-eight per cent of respondents said there was a hiring freeze in place, compared with 79 per cent six months ago (see chart 2). But 17 per cent now report hiring new staff to help cope with the increased demand; in May, this figure was only 7 per cent.
Ulrich Piepel is CPO of the RWE Group, based in Germany, and managing director of RW Service, its shared service centre. For him, the downturn has been an opportunity to get more spend categories under management, including traditional “maverick” areas – something that 63 per cent of survey respondents have also done. “In three months we have got everything to do with consulting – management, legal, and HR – put through procurement,” he says. “There is more of a will to focus on cash and on the ability of the procurement department to negotiate the rates down and build up competition.
“We’re also working together more as a procurement family because we have to behave as one single organisation for the whole of RWE. We have quarterly reviews with all our different procurement companies and people are really inclined to use supplier contracts, bundle volumes and learn from each other.”
As a result the procurement department has become far more centralised, he adds, and functions in subsidiary organisations are more willing to set up their model on the same lines as their parent body. Others have turned to technology to streamline processes and get more spend under management. Austrian bank BAHWAG PSK, for example, implemented an e-procurement system shortly after it was acquired by a US-owned venture capital company in 2007, which Rafey Masood, the bank’s CPO, says helped to make savings of €56 million in non-personnel costs in the past year, partly through the use of e-sourcing initiatives and reverse auctions.
“We’ve really focused on governance and compliance and making sure that all spend above €10,000 was negotiated or at least reviewed by the procurement team,” he says. “Anything that was renewed, or where amendments were made, all went through procurement so this year was much more focused. The next step we’re looking at is deploying this to our wholly owned subsidiaries.”
For David Harrison, director of sourcing and contracting at UK-based biopharma business UCB, the focus has been on off shoring parts of the organisation’s transactional activities, including those undertaken by procurement. “It’s definitely a response to the economic conditions,” he says. “The company is looking to trim its bottom line and outsourcing is a big part of driving efficiencies. We’re part of that in terms of going out and doing the shopping off shore but we’re also having to be part of the solution as we’re mediating between vendors and accounts payable, for instance.”
Itron, a utilities metering and technology company, is one of the few businesses that has bucked the trend during the downturn, on the back of growing demand for smart and pre-paid meters. The procurement function has been able to use the past 12 months to restructure, as well as providing a good opportunity to negotiate long-term contracts with suppliers.
“We used to manage our global spend on a fairly ad hoc basis so we didn’t have a global team for common commodities; they tended to be handled by commodity specialists in their spare time,” says Nigel Coghlan, global procurement development manager. “But we’ve formalised that structure now with five global category managers working for the head of purchasing for the electricity group. We’ve taken a much more global approach to purchasing spend.”
Chart 2: In which of the following ways have your operating resources been affected?
Key suppliers
T H When asked about the prospect of one or more key suppliers failing in the next two quarters, only 4 per cent said they were “very concerned” and 40 per cent said they were “concerned”, down from 27 per cent and 48 per cent six months ago (see chart 3). Twenty-six per cent said they had been affected by a major supplier failing in 2009.
“This is the one area that is a clear concern,” says Douglas Else-Jack, vice president, corporate purchasing, at lift manufacturer Schindler Management, based in Switzerland. “The costs, in a way, are business as usual, although we did make extra efforts in that area.
“We haven’t had many collapses but I am aware of a couple of suppliers that are at the very least at the initial stages of possible liquidation and that creates enormous efforts internally. While we were dual-sourced for some products, with others we’re having to create major efforts to position ourselves to be able to re-source.”
As a result, more attention has been focused on alternative sources of supply, he says, as well as getting closer to suppliers to help understand the risks they face and identifying tooling that could be taken to alternative providers if necessary. In certain cases it has even meant pre-paying for goods or building up stock to keep the supplier trading.
Like many CPOs, Else-Jack has found historical sources of financial information of limited use during the current crisis. “It’s a year and a half or two years out of date when I receive it,” he says. “It tells me nothing about their health other than two years ago it looked OK. The main interest is where they are from a cash-flow perspective today.
“We’re having to plug ourselves much closer into our suppliers and in many cases demand that they provide us with this kind of information,” he continues. “But, of course, they’re not obliged to; they have to agree to it and the more trouble they’re in, the less likely they are to want to show that. Some have refused and as soon as you get a refusal that increases the risk profile, so the heat is then turned up on the category manager to find alternatives.”
The survey found that 82 per cent of CPOs rely on market intelligence such as newsfeeds or trade shows to keep up to date with information surrounding the health of suppliers, and 78 per cent are keeping a much closer eye on supplier performance and financials.
This strategy has been employed by Harrison. “We’ve built a lot of health criteria into our supplier evaluations and we’re having conversations with our relationship managers internally that we wouldn’t have had in the past,” he says. “Previously we’d evaluate them on how they’ve performed against the market norms but now we’re talking a lot about whether they’re stable.
“It’s the forward-looking sources that we’re looking at – script reports and FirstWord [a customisable business intelligence resource for pharmaceutical professionals] – that bring market news and information as it happens. It’s not perfect because it puts you in the realm of market rumours but it’s the only forward-looking information available at the moment.”
Chart 3: How concerned are you about the prospect of one or more of your key suppliers failing in the next two quarters?
As the economy begins a fragile recovery, CPOs expect a variety of other challenges to appear on the horizon. The main concern is the re-emergence of commodity price inflation, seen as a potential issue by 84 per cent of respondents (see chart 4). Other challenges cited by respondents include supply shortages (53 per cent), boosting internal talent pools and morale (44 per cent) and rebuilding supplier relationships (31 per cent).
“I see the potential for inflation, not in 2010 but 2011 and 2012, on account of floating huge amounts of money into the market,” says Piepel. “That means that you need to go into longer contracts and you also need to ensure that raw material prices somehow get fixed. We don’t see a big increase in steel prices and copper prices because of current capacity issues but sooner or later these will be resolved. In some cases, we might take half-year or one-year contracts to three-year deals but that also depends on whether we have reached a good price level.”
Chart 4: what do you see as the main challenges for procurement as the economy starts to recover?
Longer-term deals
At Itron, Coghlan is also trying to tie down suppliers to longer-term deals in anticipation of supply shortages once demand picks up. “It’s pretty cyclical in our business and when all the manufacturers are cutting back, reducing stock and mothballing facilities, they don’t have the facilities to ramp up as you start getting a bit of demand coming back,” he says. “Suddenly there’s no inventory and no supply chain in place and you start to get 20, 30 or 40-week lead times.
“We’re trying to give suppliers better visibility of what our requirements are further in advance. In the manufacturing sites, we’re pushing the business units to give us more visibility as to what their requirements might be and we’re communicating a lot more about what the issues might be in terms of lead times regarding components and materials. The emphasis has shifted from looking at the lower-cost suppliers to more secure suppliers that we’ve worked with for a while.
“Whereas we’ve traditionally worked on an annual cycle, we’re now trying to negotiate two, three or four-year agreements so we’ve got not only guaranteed supply but also some guaranteed cost improvements,” he adds. “Most suppliers are keen; they just find that it’s a bit strange from us.” Others are concerned about the prospect of talent shortages and losing top employees once the jobs market picks up again. CPO Agenda’s survey found that only 33 per cent of CPOs were confident they had sufficient skills and headcount to cope with the challenges of the next 12-18 months, down from 46 per cent six months ago (see chart 5).
chart 5: Do you have access to the skills/people you need, either inside the procurement function or from elsewhere in your organisation to adequately manage current challenges and those expected in the next 12-18 months
“There are still significant gaps when you’re looking for people with the right degree of skills,” says Else-Jack at Schindler Management. “We’ve increased the amount of training and development we’re doing with our own personnel but the better you make them the more chance there is of people trying to steal them. In the past couple of months I’ve lost one key category manager who was stolen precisely because of some of the key skills that we helped to develop. But if you look across Europe and maybe globally, the expectation to have performing purchasing functions is increasing year on year.”
UCB’s Harrison, meanwhile, will be looking for a different type of buyer to those traditionally employed by procurement. “At the moment everybody is taking a very defensive view of things and we’ve been negotiating reduced commitments but obviously in an upturn things can look very different,” he says. “Buyers might need to be a bit more entrepreneurial and start negotiating with a bullish mindset, building in extra commitment to get more out of our suppliers. Getting back to that frame of mind will be a challenge.”
The growing focus on outsourcing and offshoring also means those with crossfunctional skills will be very much in demand rather than people who are more used to negotiating and establishing initial contracts. The threat of suppliers being taken over by other organisations is also a worry for Harrison. “That takes a lot of my time; having to meet the new owners, renegotiating agreements and trying to avoid hostage negotiations,” he says. The onus is on buyers to pay attention to market rumours and identify those who may be at risk so the business can plan accordingly.
There is also a growing confidence that procurement as a discipline will emerge from the downturn with its reputation enhanced. Fifty-eight per cent of respondents said they thought the function had coped “well” and 36 per cent “very well”, reflecting a greater degree of satisfaction than six months previously, when the figures were 57 per cent and 34 per cent respectively (see chart 6).
Similarly, 58 per cent were “confident” and 35 per cent “very confident” that procurement would emerge from the downturn in a better position to contribute value to the wider business, compared with 62 per cent and 28 per cent earlier in the year.
Chart 6: How well do you believe your procurement function has coped with the changes you've faced in the downturn so far?
Greater willingness
One reason has been the greater willingness shown by the upper echelons of companies to embrace the savings that efficient procurement can bring. “We got most of our spend under management within a matter of a few months; going from 99 per cent maverick spend to compliance of around 60 or 70 per cent,” says Masood at BAHWAG PSK. “That wouldn’t have been possible without the support we got from the top management and the supervisory board.”
“We’ve been fighting to get procurement on the CEO’s focus for the past year or so and there has been a chance to do that because of the financial crisis,” adds Piepel at RWE. “We are a lot closer to the top management now and are more involved than we have ever been. There is an awareness of how much our contribution has been in the past and that this might be another key to get costs under control and to reduce expense. We asked procurement to really step into the position and we are coming out of the basement.”
Chart 7: How much longer do you expect the econimic downturn to last?
CASE STUDY
RWE GROUP: STRIKING THE RIGHT BALANCE
Juggling the pressure to secure additional savings with ensuring that suppliers remain healthy is no easy matter, says Ulrich Piepel, CPO of utility company RWE Group in Germany. “There are two hearts beating in our chest and we’re trying to ensure that we achieve both targets,” he says.
RWE will not attempt to renegotiate existing contracts but has put additional pressure on suppliers when they are due for renewal, with e-auctions playing a key part in this.
“We have increased our use of e-auctions from zero to 35 or 40 per cent over the past three years and that puts all the pressure on the supplier,” says Piepel. “It’s a tough tool.
“But on the other hand we also see that we have to have a reliable supplier base because they’re also suffering,” he says, adding that many of RWE’s suppliers are medium-sized companies that are at particular risk of cash-flow issues.
The incentive for suppliers to off set lower prices is the prospect of longer contracts.
“In many cases we’ve increased the number of years that the contract is valid for so the supplier has a very good basis to plan for the next year. If it has the contract in the bag it can get better financing,” says Piepel. “That’s our contribution to help suppliers through this turmoil.”
WHAT THE CPOs ARE SAYING
“We have definitely learned a great deal from the experience and this should help us add value in the future” Head of global procurement, manufacturing, UK
“Our greatest problem is the availability of good, up-to-date financial information, which is not based on information that’s 18 months out of date. The effort of reviewing current data is very high and, of course, relies on suppliers that are prepared to make full disclosures” Vice-president, corporate procurement, automotive, Switzerland
“Fewer suppliers have ceased to trade than was expected. Generally, suppliers are better able to match capacity to demand and are more able to expand or contract to meet market needs” Head of global procurement, manufacturing, UK
“We note an increased willingness/desire by suppliers to share useful information openly, to engage in joint development and to take the long-term view if we can reassure them about tomorrow. Suppliers are also seeking reassurance from our C-level executives more frequently than in earlier times” Director of strategic sourcing, IT, France
