“Companies operate in an increasingly global and competitive market – and are now faced with growing economic uncertainty,” said Robert A. Rudzki, co-author of the book Straight to the Bottom Line, and President of the management consultancy Greybeard Advisors LLC. “There are too many examples of companies that have tried the ‘quick and dirty’ approach to cost reduction, only to find that their wins were not sustainable over time. Top management needs to think strategically and work collectively to ensure meaningful, effective action.”
Rudzki, an author of three leading business books and former Chief Procurement Officer with several Fortune 500 companies, 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.
“In the last economic downturn in the early 2000s, many companies rushed to cut costs, but many of the cuts they made were not strategic and ended costing the company in the long run,” said Donavon Favre, a professor supply chain strategies at North Carolina State University. “The decisions companies make today will impact how they are operating in a year or two years time, so the decisions need to be well thought out and with an eye toward the future. Those who get lean intelligently now, will excel in the future.”
Professor Favre is a contributing author to three supply management books and a world-renown expert on sourcing. Favre previously founded and led the procurement outsourcing practice at Accenture, the global consulting firm, building the largest procurement outsourcing practice in the world.
“How can you control spending when you don’t even know what you’re spending? Most Fortune 1000 companies do not have a real time view into their spending. The average CEO, CFO and CPO are typically looking at out-dated data. It’s their dirty little secret,” said Kirit Pandit, author of “Spend Analysis: The Window into Strategic Sourcing,” which has been described as “the definitive book on spend analysis.” “Companies have long been shackled by the dispersed and disparate nature of their spend data. It’s stuck in dozens of different systems and departments around the globe. However, today there are software tools and outsourced processes that can be used to give a current, consolidated view of spending, and it’s really unacceptable in this environment not to be giving your company that view.”
The group came up with the Five Actions CFOs and CPOs Should Take Now to Prepare for an Economic Downturn.
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 ERP platform, and can analyze and drill down on spending along dozens of different dimensions including by commodity, cost center, GL account, geography, time, payment terms, and more.
Strategy #2 – Take 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. 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. Further, 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 #4 – Mitigate 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 #5 – Do 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, provide a good starting point for the evaluation of such technologies
A Special Note on Transportation and Fuel Prices
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. Even with oil at more than $115 per barrel, financial experts caution that companies should expect that fuel and transportation costs may continue to rise in the coming months. 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. By using sourcing services to assist your company with high value, high risk sourcing categories, experience shows your company can save more money in less time. Advanced sourcing services leverage the best sourcing technologies and teams of experts, as well as global consulting partners, to help companies reduce complex categories of spending, such as transportation services.
“The inflationary fuel market is adding even more complexity to transportation sourcing. Companies that continue to source will be missing significant savings opportunities if they continue to source ‘the old fashioned way.’ 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 such a spend categories dictate,” said Sean Correll, director of consulting services at Emptoris, Inc.
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