Last November, Basware released a research report on “Cost of Control: The Real Price of Cost Cutting” that expanded upon their “Cost of Control” research summary (that they released last June) with in-depth interviews to illuminate some of the key issues that will form supply management strategy in the years to come. The white paper illuminated some good points which I’d like to expand on in this post.

Technology is Key to Efficiency

The report noted that respondents are alive and alert to the potential of efficiencies delivered through the use of technology, although IT investment is tight in the current market and that investment funds are likely to be made available where the business case is able to deliver tangible, short-term savings. This is positive — in that business are starting to see the value technology can deliver, and negative — in that business won’t invest unless they are convinced they can see immediate payback. In other words, as long as the market is tight, they are going to postpone new technology purchases and continue to bleed year after year, hoping that they’ll still have blood left when the economy improves.

Unfortunately, this report, like many others, did not address how to deal with this problem. The answer lies not in the ROI analysis (which is there, but not always rapid enough to justify six or seven figures up front) but in the approach to technology acquisition and payment. Businesses need to understand that it’s a tough economy for vendors too and that you don’t need to pay for it all up front anymore. Not only can you start with a SaaS pay-as-you-go solution (which will generate instant savings as long as you select a solution that costs less per month than the minimum average monthly ROI you expect), but most businesses will give you a payment plan in this economy, even if you buy a perpetual license. Furthermore, you can also pay as you go on services and support, and many organizations will even give you a payment plan on up front installation and integration if a lot of work is needed. Vendors would rather be paid tomorrow for work done today than not be paid at all.

Procurement and Finance is a Tense Relationship

A number of recurring issues erode the relationship between the functions but encouragingly cause regret on both sides. Whether Procurement reports to Finance or to the Board, Procurement has to work hand-in-hand with Finance, respect the cash-flow realities of the business, and make purchases that have the greatest positive impact to the bottom line. You’re not saving 2% by agreeing to early payment if you have to borrow the money at 24% annual interest because your customers are all paying late. Cost of capital, currency conversions, cost of commodity risk management (through hedge funds, futures, etc.) all have to be taken into your total cost of ownership equation — not just unit price, shipping price, storage price, and tariffs.

Again, the report presented no clear advice on how to resolve the conflict. While there is no answer that will be right for everyone, you need to start with the formation of cross-functional teams on every sourcing project which includes a Finance representative who can help you understand the financial impacts and ramifications of a proposed sourcing arrangement. Getting Finance’s input before the contract is signed will go a long way towards easing the tension and maintaining the relationship.

Minor Risks are Important Too

Businesses are looking for the ‘Tsunami’ events that take place in the supply chain, but failing to keep track of the ‘soil erosion’ that is more likely to be experienced over time with regards to quality and servicing issues surrounding the supplier relationship. Furthermore, respondents are happy to articulate potential failures among their key suppliers and the discrete disappearance of supplier businesses, but do not appear to pay enough attention to the broader issues created by compound supplier instability.

The fact of that matter is that if a number of minor risks materialize simultaneously, they can be just as devastating as a major risk materializing. Let’s say you make a product that requires five key components. What if all five suppliers experience problems at the same time and your orders are delayed at least 90 days from each supplier, in your peak season. One component, you could probably go into recovery mode and find a replacement quickly. Two components, super-charged fire-fighting mode. Five components? Forget it! All risks and suppliers have to be tracked and attention paid if leading indicators indicate trouble.

In other words, regardless of what fire you’re fighting today, there’s a big picture and you better not lose track of it. But it’s important to have a plan, and that’s where the report stops short.

Finally, don’t forget that, Across-the-Board Year-Over-Year Savings Targets are Stupid. After all, I even gave you Yet Another Reason Across-the-Board Year-Over-Year Savings Targets are Stupid.

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