I’m glad I read all the way to the bottom of a recent article in CPO Agenda on cutting it fine, even though I became a little discouraged about half-way through, because the response from Willem F van Oppen, owner of Provoque Consulting in The Netherlands, succinctly summarized the problem with continuously focussing on the non-strategic activity of cost cutting.

As long as companies only play to shareholder value and its myopic dynamics, procurement will not be able to successfully drive a strategic agenda of value sourcing.

There’s a limit as to how much cost can be cut. That’s why, by the third reverse auction on a category, costs actually go up. At some point, all of the margin is squeezed out of a supplier and the costs are not going to go down without a sacrifice in quality or service unless value is improved. This might take the form of increased quality (since a product that lasted longer or sold at a higher price would, relatively speaking, cost less) or better service (since service has a cost too) or it could take the form of raw material substitution or production process upgrades (since reduced production time would lower production costs). Either way, value is being added.

As Rod Wood pointed out, a key role of the Procurement function is cost management. Cost cutting is a knee-jerk reaction to a problem that often introduces more problems than it solves (when quality, service, and/or on-time delivery decreases) whereas cost management is done according to a strategic plan that balances quality, risk, security of supply, product development, and logistics. The odds of the success of the former aren’t much better than a roulette table while the odds of success of the latter are about equal to the house winning.