News focus: 'Spend less and control more'

4 January 2010

7 January 2010 | Gareth Mytton

That was the message that came through loud and clear when SM asked purchasers what their priorities would be in 2010. Gareth Mytton reports

After the excess and celebration of the festive season, January is traditionally a time for cutting
back. But for 2010, purchasers are expecting this mood of austerity to last for the next 12 months.

“Cost-cutting” will be the main focus for 38 per cent of respondents to the latest SM100 poll, which asked buyers to identify the top priority for procurement in their organisation (See SM100 poll). With an additional 22 per cent saying their main concern was to get more spend areas under purchasing’s control, the dominant tone seems to be: spend less and control more.

But scratch deeper and a more complex picture emerges. David Harrison, director of sourcing and contracting at pharmaceutical firm UCB Celltech, is one of the respondents whose chief aim is cost-cutting.

His department has a “double-edged mandate”, he says, with its control over spending dependent on making savings of £35 million a year. “Our CEO expects one thing: savings,” Harrison explains.

Procurement can bring far more value than merely savings, he says, but its order from the CEO depends on cutbacks alone.

But he looks beyond the recession for factors that influence procurement’s internal standing. “We face our own challenges that predate the current climate,” he says, and points to an investment in procurement to help the company tackle the industry-wide issue of patent expiry on drugs.

He will be looking for savings in several areas of indirect purchasing, among them the external companies that run clinical trials (which are “very expensive” to provide), HR services and consulting.

At building materials supplier Tarmac, Adrian Cook, executive director – procurement is also focused on expenditure.

“Taking cost out of the supply chain is the number one priority,” he says, “but not at any cost.”

His company is planning to halve its supply base to 3,000 vendors in the next 18 months to make “tens of millions of pounds in savings”. With its strategic suppliers, the company will share the savings. His philosophy, and Tarmac’s, is to forge “deeper relations with fewer suppliers”.

In any economic climate, cost-cutting will be a top-three issue for purchasing, says Tom Woodham, director of supply chain consultancy Crimson & Co. But this year, he expects cuts will be less of an issue than supplier relationship management. “I think a lot of people have been exposed in terms of supplier relations,” he explains.

Although in some cases this exposure has been when the supplier has gone out of business, it has also been the realisation that the supplier is more valuable to the purchaser than the other way around. Savings top the agenda for Bill Fyfe, procurement manager at heritage charity National Trust for Scotland.

“Most of the other options [in the poll] are ‘nice to’ or ‘should do’,” he says. These options included supplier relationship management, increasing outsourcing, sustainable procurement and raising the profession’s profile.

“As a heritage organisation, the more money we save, the more we have to spend on conservation.” When Fyfe, the charity’s sole procurement professional, was appointed two years ago, he was given a savings target of £1 million in three years. The savings have already reached £1.5 million, including a 70 per cent saving on logistics by switching deliveries to its stationery supplier, and an early 30 per cent saving on property insurance (the NTS has a portfolio of 130 buildings, from offices to listed buildings and castles).

Fyfe says the latter breakthrough helped to spread the word. Like Harrison, he enjoys the support of senior management and, this month, he’s taking the message of procurement to staff. “We’re running training sessions on procurement and its legal aspects,” he says. “What we’re trying to do is to get the message out there to our 500 buyers.”

Another purchasing professional who is taking procurement’s message to stakeholders is Adam Smith, purchasing and logistics manager at manufacturer Morgan Technical Ceramics. In his case, the priority for 2010 is to raise procurement’s profile so that it gets involved earlier in projects.

Since arriving in February, he has made efforts, with the support of his manager, to change the view that procurement is a service function – “if people aren’t inviting procurement to meetings, my boss will ask them why” – although he admits it is a gradual process.

Tarmac’s Cook echoes the long-term nature of building these relationships: “It’s taken us years and we’re still not there.”

The second most common priority for purchasing departments this year is getting more spend areas under control. The London Universities Purchasing Consortium (LUPC) is bidding to do just this as it expects to publish an OJEU notice this month for a legal services contract worth around £10 million a year.

Andy Davies, the consortium’s director, says the contract covers the specialist legal advice that institutions need on student welfare issues. University finance directors see cutting spending on professional services as a priority, he explains, and a number of CPOs in the LUPC network received phone calls from their vice-chancellors, demanding they “sort it out”.

He hopes that a new framework for temporary labour, which starts next month, will also attract more use than the previous deal. The new contract includes smaller providers of specialist staff, such as IT professionals, that consortium members had gone to rather than use the larger, more generalist recruitment consultancies on the previous framework.

Elsewhere, Gillian Fletcher, director of sourcing at defence supplier Babcock International Group, says her priority is to increase outsourcing to gain more control over costs.

“Our executive board has wanted for a number of years to drive flexibility into the cost base,” she says, explaining that the workload for the company, which spends £12- 15 million a year on raw materials, has become increasingly volatile.

“Controlling spend is vital, especially in a volatile recession. Outsourcing has to achieve two things: the flexibility I want and deliver a cost benefit.”

Another change in the purchasing landscape, says Bradley Feuling, CEO of Kong and Allan Consulting, a Shanghai-based supply chain consultancy, is that clients are asking “a lot more questions” about sourcing from China.

“Three or four years ago, it was a boom time,” he says. “It was accepted that China is cheaper and that was the end of the debate.”

Today, buyers must be more sophisticated about low cost country sourcing amid increases in raw material prices, Feuling says.

As an example, he recalls a client asking: “Why are we shipping these particular products assembled rather than disassembled? There’s a lot of air in that box.”

Feuling adds that some companies are looking for savings by moving away from using agents to having their own direct suppliers in China.

Other purchasers are contributing far more than just savings. At JMC Aquatics, an importer and wholesaler of tropical fish, Steve Taylor is working to diversify its product lines and increase the company’s market share.

“We’re branching into pet products, which opens up new business,” he explains, as customers can buy more than fish and “dry goods” from the company. This, he hopes, will improve sales.

Buyers’ priorities for next year may differ, but they are connected by a strong ambition to get results and continue to boost their profile.

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