At the start of the year, many businesses were still pursuing a policy of completely integrated supply chains. Few had given thought to what we now know as ‘high impact, low probability’ events. Then the earthquake and tsunami hit Japan. Our assumptions about the resilience of supply chains were shattered as its toll on the production of many different goods became apparent. We must now think very differently about single supply arrangements if that supplier could face major disruption.
The first half of 2011 was a successful one for many businesses and the expectations were that the year would continue in much the same vein. But from July onwards the economy crashed into reverse as the euro debacle began to unfold. Suddenly, a significant element of political risk thrust itself into business decision-making as the very survival of the euro, integrity of the eurozone and the likely consequences for the UK economy were called into question.
Unfortunately, we can expect more of the same for 2012. Many other elements of potentially seismic consequence, such as US debt, the European social economic model and pension liabilities have yet to play out in no doubt unexpected ways. Technology, speed of information, volatile markets and a high degree of uncertainty have all changed the playing field on which businesses operate.
Businesses uncertain of the future will hunker down and delay key investment decisions. And we can expect a second round of significant cost cutting. In 2008, the easy fat was cut after a decade of plenty. Many businesses made the squeeze and came out leaner. 2012 will not be the same. Few if any ‘easy wins’ exist. There is still fat to cut, but plcs will need to be far smarter to extract it. And these costs are not going to be where management has traditionally assumed them to be.
Going into 2012, two thirds of costs for FTSE businesses that can be influenced (that is excluding interest and non-cash costs like depreciation) are bought externally. This trend of buying manufactured goods and external services seems likely to continue, so it is no longer the case that simply cutting heads will do the heavy lifting of reducing costs.
Instead, businesses will have to look within their supplier community if costs are to reduce. In 2008, many businesses put the thumbscrews on suppliers to reduce prices. But this tool has its limits. In 2012, businesses are going to have to look at much more. After years of under-investment (procurement functions are usually tiny compared to every other department in a business, despite the scale of what is spent) necessity is going to force business to finally get on top of the area of cost that is the largest, but least visible to them.
Nowhere is this more apparent than in the retail industry, particularly in the goods-not-for-resale area. Consumer confidence is still weak as we enter the busiest period of the year for retailers, with many hoping to recoup sales leading up to the 2012 Olympics. However, there is strong scepticism as to whether this major global event will live up to expectations. The question for many is, when there is stagnation or no top line growth and with the majority of quick-win cost cuts completed, what else can be done?
While there are many external factors that are out of a business’s control and, as 2011 has taught us, hard to predict, procurement is definitely in control and presents a hidden opportunity to better manage costs and boost efficiency in these tough economic times.
☛ Guy Strafford is chief client officer at buyingTeam