While some argue the past year has exposed supply chain fragility and we cannot sustain a savings first approach, others believe it’s the only way to recoup losses
Procurement should aim to add value and non-monetary benefits
Graham Crawshaw, services director at CASME
“Procurement’s focus on cost savings, driven partly by its heritage and partly by its limited ability to promote value beyond monetary metrics, has not always been welcomed by businesses, particularly if savings are reallocated by finance or incorporated into a reduced budget the following year.
Mature procurement teams understand this and now play down cost savings during conversations with stakeholders, instead focusing on where procurement can add value and provide non-monetary benefits. For example, by achieving CSR objectives, diversity in the supply chain, and being a customer of choice.
With a mindset that extends beyond pure cost savings, stakeholders are becoming interested in the value procurement can offer beyond savings. What needs to be appreciated is that by focusing on the areas of adding value, a beneficial consequence is that cost is also taken out of the process. This approach is more sustainable in the long term and is not at the expense of the supplier’s profitability.
Procurement may need to renegotiate its relationship with finance departments, recognising that a successful result should be determined by both qualitative and quantitative metrics. This is important because years of work applied to strengthening business relationships with suppliers can be quickly undone if the CFO dictates a refocus purely on achieving cost savings and improvements to working capital.
Is this going to be an inevitable mandate response by finance when emerging from the pandemic? If so, it will require a certain level of maturity for procurement to stand up to this dictate and demonstrate an alternative approach.
Over time, and with sufficient effort and contributions by procurement, the perception of the function will change from being seen entirely as cost-focused and into one that is recognised as delivering significant value to the business.”
A tactical focus on costs will enable you to better address strategies
Steven Bates, strategic procurement specialist at Auditel
“The role of procurement as a strategic activity has never been more important than at present. I’ve chaired a number of procurement panels this year on the themes of sustainability in the supply chain, ethical standards for suppliers and how to deal with the lower resilience of global supply chains caused by the pandemic and Brexit.
These items are always in the news. Yet when you look at challenges for individual businesses operating in global and UK markets there are additional considerations. For example, UK manufacturers want to remain competitive in a post-Brexit environment; law firms want to ensure their clients who have grown accustomed to using technology during the pandemic receive excellent customer experience; hotels are looking for a path to recover lost revenue per available room.
The pandemic caused many businesses to move into survival mode and overnight make significant cost reductions. Examples are the closure of offices, home working, suspension of supply agreements and furloughing of staff.
When businesses start trading post-lockdown there is a high risk those costs will return. So why is cost management important? Every £1,000 you can keep from coming back as a cost could represent the same value as £10,000 in sale revenue – more if your net profit margin is less than 10%. Moreover, cash saved can be redirected to other activities, such as additional marketing or investing in new systems and initiatives, which help your business to grow at a time when gaining more market share has never been more pressing.
These same savings can also quickly rebuild cash reserves, strengthen balance sheets and satisfy shareholders and stakeholders in their businesses. Tactical focus on cost management will enable businesses to better address their strategic objectives.”