Procurement's role in helping businesses adapt to the National Living Wage

The surprise budget announcement of the National Living Wage will see workers aged over 25 in the UK paid a minimum of £7.20 an hour from April 2016, rising to £9 by 2020.

This legislative change will have a big effect on many sectors, including retail, which employs over 20 per cent of those on the current minimum wage. To put the cost into some context, a typical retailer employing 25,000 people on a rate of £7 would expect to incur an additional £100 million a year wage bill by 2020.

Although the direct increase in costs organisations will see are self-evident, and have been heavily reported on, less attention has been given to the additional cost inflation retailers will see through their supply chains and specifically from their indirect costs, including contracts such as catering, cleaning, logistics and warehousing.

For example, indirect costs for a retailer can account for 10-25 per cent of all expenditure and so while clearly it’s a major cost line, it currently does not seem to receive the level of strategic focus and attention it needs.

Organisations will need to look at how to respond to, and mitigate, such substantial future cost challenges without passing 100 per cent of the expense on to customers. As we see it, there are two approaches that can be taken.

The tactical approach: Focuses on ways to streamline the workforce. Some firms may also discuss the possibility of taking out costs by reducing perks such as staff discounts.

The strategic approach: Centres on the need for greater productivity in light of the wider structural changes of which the National Living Wage is a part. Relating this back to retail again, the sector has undergone fundamental change and disruption in the new digital age, and successful retailers continue to adapt to rapidly changing consumer demands on their businesses.

Forward thinking organisations are meeting these challenges by engaging with suppliers, investing in systems, and getting the basics right with a co-ordinated strategy across the supply chain, customer facing channels as well as reviewing their underlying operating models.

Value released from effective indirect procurement can enable and accelerate the strategic approach with focus on this all too often untapped value pool.  

In the short term, significant savings can be found without some of the complexity and trade-offs often required to find efficiencies in other areas. Longer term, embedding strategic spend management principles into every day thinking forms the bedrock for swifter adaptation to wider structural changes and the mitigation of both the direct and indirect costs that will entail.

In today’s ever-changing world and challenging environment, there is no set formula for who will win or lose. What is clear though is that successful organisations will not simply rely on short-term tactical approaches, but will have a clear forward-thinking strategy that recognises that traditional approaches and business models may no longer work.

The introduction of the National Living Wage should only serve as an opportunity to explore more strategic solutions. Converging on untapped resources allows organisations to release huge value in order to drive or accelerate transformation programmes, effectively using strategic procurement as a business enabler.

☛ David Hodge is manager, procurement and sourcing, at PwC

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