A Couple of "Five Procurement Commandments" in a Down Economy

As is the case with white papers, vendors' press releases (PR) can range from blatant bragging about the "latest-and-greatest" product capabilities (and other marketing "fluff") to tastefully asserting competence and educating the market about specific issues.

One example of the latter would be Emptoris' April 2008 PR on the findings  of a panel of financial and procurement experts that have worked and consulted with leading Fortune 1000 companies. These experts offered their advice to chief procurement officers (CPOs) on actions to take to weather, and even excel in, a potentially uncertain economic environment.

The expert panel participated in a brainstorming session with leading financial, technology and procurement consultants to offer a list of immediate and intermediate steps that companies can take to gain greater control over spending and effectively reduce costs.

The panel discussion was sponsored by Emptoris, a provider of sourcing, supplier relationship management (SRM) and contract management software. While describing Emptoris deserves a blog series on its own, I will just say for now that its solutions are used by successful Global 2000 companies in many industries.

Some of its marquee customers include American Express, Boeing, Cigna, ConocoPhillips, GlaxoSmithKline, Kraft, Motorola, Owens Corning, Syngenta, UnitedHealthCare and Vodafone. You can find more information on the vendor in TEC's earlier article entitled "Emptoris 'Procures' Zeborg's Spend Management Expertise."

The gist of the matter here is that companies operate in an increasingly global and competitive market and are now faced with growing economic uncertainty. There are too many examples of companies that have tried the "quick and dirty" (seemingly low hanging fruit) approach to cost reduction, only to find that their easy wins were not sustainable over time.  Top management thus needs to think strategically and work collectively to ensure meaningful, effective action.

It is a well known fact that in good economic times companies focus on revenues (top line), whereas cutting costs (bottom line) is "job number one" in bad economic times. Accordingly, in the last economic downturn in the early 2000s, many companies rushed to cut costs, but many of the cuts they made were apparently not strategic and ended costing the company in the long run.

The decisions companies make today will impact how they are operating in a year or two years' time. Thus, the decisions need to be well thought out and with an eye toward the future.  Those who get lean (and mean) intelligently now should excel in the future.

What Experts Recommend

For its brainstorming panel on how to address the current economic uncertainty, Emptoris assembled six experts with backgrounds in finance, operations, procurement and technology and tasked them with developing five actions CPOs could take immediately to gain greater control over spending and cut costs without reducing operational effectiveness.

The group came up with the following Five Actions CPOs Should Take Now to Prepare for an Economic Downturn:
Strategy #1 - Get Quick Visibility into Spending:  A company can’t control what it can’t see.  Gaining global, enterprise visibility into spending is much easier now than it was even a few years ago with the advent of automated spend analysis technologies.  With software programs or outsourced aggregation of data, companies can get a current view into spending within as little as 90 days.

Experts suggest that spend visibility updates should be done on a quarterly basis at a minimum, but for relatively minimal costs, it is realistic today to have monthly spend visibility updates company-wide.  Leading spend analysis software technologies can aggregate data from dozens of different systems, including every major enterprise resource planning (ERP) platform, and can analyze and drill down on spending along dozens of different dimensions including by commodity, cost center, general ledger (GL) account, geography, time, payment terms, and more.

Strategy #2Take Steps to Mitigate Inflation:  Inflation is the X factor in this economic downturn, experts say, and getting ahead of it is critical.  The panel recommended re-negotiating contracts with target suppliers and sourcing for value as immediate steps companies could take to help insulate themselves against inflation.  In sourcing and contract re-negotiation, the first priority should be a focus on high value, high risk areas such as transportation and fuel.

Of course, one of the key contributors to rising costs are fuel prices and the impact on transportation costs for retail, consumer products and distribution companies, can be significant.  When sourcing complex services such as transportation, packaging and fleet vehicles and services, your company’s internal team may benefit from the vertical or advanced sourcing expertise of outside consultants and services.  In addition, the experts say to focus on categories where you can negotiate lower prices with suppliers without incurring higher costs elsewhere or damaging your long term interests around delivery, performance and availability.

Strategy #3 - Renegotiate and Enforce Compliance to Contracts:  One of the big areas of loss for companies is in supplier non-compliance to existing contracts.  Whether it’s enforcing negotiated pricing, realizing quantity discounts or ensuring quality standards and associated penalties and discounts, contract compliance becomes even more essential in a recessionary environment.

Furthermore, experts say that companies should target certain contracts for re-negotiations in an economic downturn, noting that key suppliers may be more willing to re-negotiate than perceived.  Technology can play an important role in helping companies’ link contract terms to spending and thus reducing leakage – and in linking contracts to supplier performance to track commitments versus actual performance metrics.

Strategy #4Mitigate Risks When Pursuing Cost Reductions :  A bad sourcing decision or supplier issue that can be addressed and weathered in a good economy, can be devastating in a bad economy.  Sourcing and quality experts say that one of the biggest strategic mistakes companies make is strictly looking for lower costs, rather than evaluating overall value with suppliers.

The drive for lower costs that has led to outsourcing and Low Cost Country Sourcing (LCCS) has brought with it sometimes unforeseen downsides, such as poor quality components, delivery issues, increased risks and service interruptions.  Thus, an increased reliance on LCCS and outsourcing demands an even greater role for evaluating overall value and capabilities when sourcing for lower cost.

Optimization is a concept and technology employed by the leaders in global sourcing that helps executives balance risks and rewards. Sourcing technologies and services with optimization capabilities allow for sourcing events that factor in a range of requirements which enables decision making that extends beyond cost.

Strategy #5Do More with Less:   In a recession budgets are being trimmed and headcount reduced , yet with global competitive pressures your department may be asked to do even more.   Seize the challenge and focus on making your department more efficient.  Experts say the surest way to improve efficiency is in the smart application of technology.  According to studies, virtually all the productivity gains made by US companies over the past quarter century have come via technology.

However, experts caution that there are risks associated with the selection of which technologies to implement.   They recommend going only with proven, best-of-breed technologies that have been tested and successful at other leading Fortune 1000 companies.  Consulting partners, peers and leading analyst firms, such as Gartner and Forrester (and I would boldly add TEC's SRM Evaluation Center too) provide a good starting point for the evaluation of such technologies.

So, Why Did I Like This Particular PR?

Well, because its findings rang true independently of whether the sponsoring vendor was Emptoris, Ariba, SAP or any other SRM provider for that matter. Its findings also concurred with what I learned last year while pursuing my APICS CSCP (Certified Supply Chain Professional) title (yes, I am showing off a bit).

Namely, the Module Three of the APICS CSCP Learning System, entitled "Managing Customer and Supplier Relationships" teaches that strategic sourcing has made the task of purchasing (procurement) more complex. What had been sporadic transactions in the past are now recurring relationships that must be planned, monitored, and measured for their impact on business goals. The best supplier may not be the one who offers the lowest price but rather the one who can collaborate with the buyer to achieve multiple, interrelated business goals.

Furthermore, as sourcing and procurement have become more strategic and global, purchasing roles have stratified. Namely, the procurement executives (vice presidents [VPs] or CPOs) in a business employing global sourcing and SRM tools now assume a more strategic role. These individuals may be charged with tasks such as:

  • identify strategies to add value to products through managing supplier relationships;

  • identify and research strategic partners;

  • develop certification standards and programs for improving supplier performance;

  • negotiate long-term contracts;

  • serve on cross-functional teams to develop processes for integrating workflows and sharing information;

  • enforce compliance with sourcing contracts;

  • assemble and manage the sourcing risk portfolio;

  • manage relationships with strategic sourcing partners; and

  • analyze purchasing data to report impact on corporate goals and to identify areas for improvements.

These managers will have to strive to improve products' time to market to capture savings faster, while exploring all of the elements of total cost of sourcing, encouraging supplier innovation during the negotiation process, creating win-win situations that create value for both parties (not just squeezing supplier margins as usual), and addressing multiple (and often) conflicting objectives during their decision-making process to identify the optimal solution.

Given the down economic environment that is again highlighting the important role of procurement in driving profitability for companies, CPOs and procurement VPs additionally have to achieve more actionable, profitable results.

CPO's vs. Procurement Clerk's Duties

For their part, the purchasing agent, buyer and/or planner assume more tactical tasks, such as the following:

  • planning and procuring supplies based on ERP systems' recommendations;

  • auditing present needs on the manufacturing floor;

  • releasing work orders for subcontractors;

  • creating purchasing planning schedules;

  • issuing and tracking purchase orders;

  • resolving discrepancies in orders or accounts; and

  • monitoring suppliers' performance and issuing reports on their timeliness, completion, and quality of work.

But while the procurement jobs may have grown more complex and demanding, they are increasingly supported by advanced SRM applications that make it easier to conduct strategic activities like sourcing research and vendor selection as well as tactical activities like issuing recurring purchase orders.

Such applications can put in-depth information about the supply channel in the hands of procurement personnel in near real-time. The current environment demands that organizations act quickly – and at the same time ensure they minimize risk.  Advanced sourcing technologies and services allow for the optimized decision making, risk mitigation and fast action that spend categories dictate.

New Procurement Jobs Descriptions

It goes without saying that the requirements for purchasing jobs have changed accordingly. Namely, CPOs must now have a greater understanding of the corporation's business goals (rather than merely the departmental goals) and how sourcing and spend management can affect achieving those goals. They must have substantial analytical abilities and people skills, including awareness of the other cultures with which they may come into contact.

On the other hand, purchasing clerical staff must be familiar with a host of SRM tools and practices, but they must also be creative in translating corporate purchasing strategies into specific tactics and in finding opportunities to improve tactical processes. They must be detail-oriented and able to track global logistics and contract performance.

Having moved from a transactional to a strategic relationship model of doing business, they must have people skills, too. Of course, both procurement managers and clerks must be customer-focused.

Mid-Market's View

Epicor Software, a stalwart mid-market ERP provider with the Epicor SRM offering [evaluate this product] following its 2002 acquisition of Clarus' e-procurement intellectual property, maintains that it is worth noting here that extremely few mid-market companies have a CPO.

The highest ranking procurement staff Epicor might run into are VPs of purchasing, sometimes just directors.  Some mid-market companies don’t even have a full-time buying staff, since purchasing is often managed within departments like information technology (IT) and facilities.

In any case, the CPO’s fundamental objectives that don’t change with the vagariesof the economy would be to acquire the goods and services needed by the company at the best possible mix of price and performance.  The focus can shift at times from operational streamlining to new product introduction (NPI) to vendor rationalization.

In lean times, there will certainly be some pressure to do even more with less, postpone large expenditures, and get additional concessions from suppliers (e.g., better shipping rates, rebates, better payment terms, etc.).  In all of this, the CPO must provide a high-quality service to the employees to encourage the proper use of systems and policies and reduce maverick purchasing.

Spend Matters' View

It is difficult to discuss this topic without the input and validation of a proven spend management expert, Jason Busch, formerly of FreeMarkets (prior to Ariba acquisition of the former competitor) and now the prolific author of its well-read Spend Matters blog site.  Jason's five recommendations for CPOs would be:

  1. Save money through strategic sourcing on existing categories – now more than ever (considering top line growth is more challenging);

  2. Avoid price inflation on key commodities (or having suppliers pass along price increases);

  3. Find new ways of reducing costs (e.g., supplier development/joint cost reduction efforts);

  4. Extend the reach of procurement (via new categories and new relationships in the business – e.g., IT, telecom, marketing, legal); and

  5. Explore new options for mitigating risk (e.g., financial hedging, multiple geographies, dual sourcing).

These are recommendations for the current market.  Jason thinks we’re in a bad climate now, but it is not playing by the traditional "bad market" rules (when prices should go down and the aggressive bidding out of categories leads to significant results). In other words, because of the combination of tight commodity markets/inflation and reduced demand, it is not a "normal" (traditionally good or bad) economic environment.

In anticipation of such a down market even back in 2007, Jason has already written a blog post series about the importance of investing in supply risk management, re-sourcing and more aggressively sourcing existing categories, and moving from fixed to variable cost structures. In the fourth part of his blog series, his attention was turned to the need for companies to invest more in targeting services and non-production related spend categories.

At the end of the day, what are your views, comments, opinions, etc. about the current economic climate in your region/industry and about the above-mentioned experts' recommendations? What are your best procurement practices as well as experiences with particular SRM applications?
comments powered by Disqus