Don’t get lost in cost

28 October 2011
During discussion at the recent CPO Agenda Cost-Cutting Summit, procurement’s contribution and ambition was frequently described in the following ways:
  • “Long term delivery of value for money.”
  • “Getting more for less,” and “making a broader impact for lower cost”.
  • “Leveraging your cost base,” and “creating a cost conscious culture”.
This isn’t surprising given that the purpose of the evening was to discuss how to make cost savings. But what is worrying is that these phrases were also used when discussing procurement’s role longer-term. No one doubts the value of making cost savings but there has to be a more ambitious, and relevant, statement about procurement’s role in business. To articulate it only in terms of cost savings does the cause no good whatsoever. One speaker said that his career had taken him out of procurement 10 years ago, at a time when CPOs’ main complaint was that procurement was not on the CEO’s agenda. Now back in the procurement saddle he finds this conversation still going on. It will stay that way for as long as CPOs allow procurement’s song to be sung to the cost-saving tune. The self-harming paradox is that many senior procurement people define their importance by the vast amount of money they spend, and then pin their ambitions on making it as small as possible. As acknowledged by one of the panellists, there is little credibility in a business process seemingly bent upon cost-saving itself out of existence. Not so long ago, a medium-sized (yet multi-national) company set out on an uphill journey towards the destination of ‘strategic procurement’. The vehicle of change was called ‘project orange’. In the early days what fuelled the vehicle was, of course, tangible cost savings. These were so significant and eye-catching that, too soon, the orange ‘brand’ was assumed to mean ‘savings’, but nothing more. So, the drivers of change worked hard to get people to see that, on the horizon, there were higher peaks to be conquered. Yes, one of the summits was called ‘cost’ but there were others as well. While the mountain range was called strategic procurement, its five summits had separate names, each signifying procurement’s presence in the business landscape:
  • Sales Growth: means benefiting from supplier innovation that enhances new product development and accelerates time to market. Having a better understanding of customers’ procurement game plans also helps sales growth.
  • Improved cost and margins: means establishing and managing a highly competitive external cost base for the company, and sustaining the alignment of costs with the company’s sales prices
  • Secure supplies and relationships: means benefiting from dependable relationships with key supply-side third parties. Supply chains are risk-managed; able to respond to up-cycles in time and volume, and also help to develop a presence in new markets and geographical sectors
  • Optimised cash and working capital: the cash available in any period equals or exceeds the company’s cash requirements.
  • Better productivity and processes: means the company’s internal processes and productivity benefit from the application of enlightened management controls and procurement policies; superior equipment; effective capex programmes and best-practice supplier support.
In due course, the orange flag was planted on the highest summit and procurement, genuinely, had arrived. Things were also done to stop the change vehicle rolling back downhill, but that’s another story. In more business-like terms the orange view of things is that procurement’s “business role” is to contribute to company strategy, then distil out its supply implications, and then act to make supply strategy happen. Procurement’s “task role” is to create and sustain the supply markets the business needs for it to succeed now and in future. By and large, the business world doesn’t enjoy this strategic view of procurement, but so long as your company is one of the ones that does then it’s your competitors, not you, who need to be worried. Procurement offers solutions to business problems, not just supply ones. All companies face challenges but tend to look internally for solutions to them. However, smart CEOs realise that better answers may lie outside the company in supply markets where, as well as risks, there is also much goodwill and ingenuity. Given the many business issues on the CEO’s agenda the CPO’s job is to help them to develop the habit of asking “how can our suppliers assist us to solve them?” That’s a lot more interesting than just placing orders, albeit cost-saved ones. * Dick Russill is a business coach and author, specializing in supply, cost and relationship management. He writes an executive coach column in CPO Agenda.
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