Cost cuts are increasing vendor risk

18 November 2009

18 November 2009 | Allie Anderson

Supplier relationships are "hanging in the balance" as a result of aggressive cost-cutting, according to an international survey of senior executives.

The study, Cost Control: The Real Price of Cost Cutting, carried out by research consultancy Loudhouse, found that immediate cutbacks across the supply chain are more pressing than long-term investment to drive savings. This was despite organisations recognising the risks involved in tackling issues from a short-term perspective.

The research was based on interviews conducted last month with 20 CPOs and CFOs from global organisations. The in-depth study follows a survey of more than 500 executives earlier this year.

Continual cost-cutting potentially makes the supplier base less stable, the report said, and finance executives are failing to notice this because they underestimate the role of procurement in managing supplier risk.

Supply chain professor Adrian Done, who helped formulate the interview questions, said: "Businesses are looking for 'tsunami' events in the supply chain but failing to keep track of the 'soil erosion' that takes place day-to-day. This mentality is a big disruption as decision-makers fail to see the sequential risks of suppliers struggling to meet demands, while obsessing about discrete insolvency episodes and their impact on short-term operations."

Respondents added that ineffective processes lead to tensions between finance and procurement, making spend visibility and transparency difficult to achieve. Improving technology and automation of finance processes was recognised as a way of ensuring long-term savings.

The research was carried out for technology company Basware following the firm's June 2009 survey of 550 finance executives about the key issues facing purchasing and finance. The first survey found half of CFOs rated procurement as 'poor to average' in curbing unnecessary spending.

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