Procurement professionals are being warned not to delay cost cutting and structural improvements to sourcing as recession looms.
GEP, a provider of consultancy, software and managed services, said organisations were challenged with navigating unprecedented disruptions and preparing for an economic downturn due to the coronavirus.
John Piatek, vice president, GEP Consulting, CPG and retail, said: “The key is not to make matters worse by solving short-term supply chain issues but ignoring initiatives to improve cash flow to strengthen their company, because the light at the end of the tunnel is an oncoming train.”
The three most common mistakes chief procurement and supply chain leaders must avoid right now are:
1. Not rapidly cutting costs and securing more cash.
Purchased and supply chain costs typically account for 50-80% of global manufacturers’ total cost structure. In the immediate term, supply chain costs will increase as manufacturers expedite shipping and pay overtime labour costs to meet customer commitments. However, leaders must improve cash flow and bolster working capital now, in order to provide greater financial flexibility going forward, by:
• Lengthening payment terms on all non-essential items. Even by a few days can make a big impact.
• Postponing or cancelling capital purchases.
• Being more forceful about what the business needs versus what the business wants.
• Discontinuing low-running SKUs and engaging suppliers to offer discounts on the remaining business.
• Linking cost-reduction programmes to real, measurable EBITDA outcomes.
2. Not accelerating supply chain agility.
With access to supply dominating the headlines, there will be a tendency to avoid making hard choices to increase supply chain agility. Leaders need to accelerate plans to diversify supply chains geographically and avoid a total loss of supply in the future. These shifts are not quick, but steps need to be taken now to build agile supplier partnerships and infrastructure.
3. Not prioritising sustainable and structural cost advantage.
While immediate, draconian cost-cutting initiatives will provide short-term results, companies find that they're not sustainable. To create structural cost advantages, augment the traditional source-to-pay process with “budget-to-pay”. This will enable procurement and finance to check every request/requisition for budget availability prior to committing spend to external suppliers, and drive cost control and financial discipline aggressively.
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