Procurement could unlock billions in profits

8 July 2013
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8 July 2013 | Andrew Allen

Reducing supply chain costs could increase company profits by billions of euros a year – far more than by cutting labour costs, according to a report into the Netherlands’ top companies.

The survey by global sourcing and procurement services provider Proxima ‎revealed that supplier costs now account for 76 per cent of the collective revenues of the Amsterdam stock exchange’s AEX25 firms. The figures mean a one per cent reduction in supplier costs could boost profits among those companies by an average of 5.4 per cent a year, the report said.

Meanwhile, reducing labour costs by the same amount would raise profits by only 0.7 per cent. Proxima found these costs had decreased by 27 per cent between 2009 and 2011, while supplier costs had increased by 49 per cent.

However, executives interviewed for the report widely under-estimated the extent to which supplier costs accounted for their total cost base, but over-estimated the importance of labour costs. “No longer is a company made up of its people, its offices and its factories. It is now a network of people and organisations supported by and contractually connected to a web of suppliers,” said the report.

Proxima said it believed the same trends were occurring in other global markets. For example, the company’s 2012 analysis of the FTSE-350 index found supplier costs were outstripping labour costs by more than five times (68.3 per cent compared with 12.9 per cent).

However, only a relatively small number of businesses were transforming their supplier relationship management models to account for the growing importance of supply chain costs. In order to capture shareholder value, organisations must factor in core and non-core suppliers to a far greater extent than they traditionally have done, the report said.

“Management that neglects the strategic aspects of its supply base or fails to maximise its value risks missing out on a significant source of long-term shareholder value,” it added. By neglecting supplier governance, oversight, control and risk, companies left themselves open to reputational, operational and financial risk, created by unforeseen problems occurring two or three steps up the supply chain.

Matthew Eatough, CEO of Proxima, said: “The analysis shows very clearly the extent to which management behaviours have yet to catch up to the new realities of operating large, diverse and fragmented organisations.”

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