Daily Archives: May 7, 2012

Have You Reached the Summit of Cost Cutting?

Cost cutting has been a major focus of your average Supply Management organization for most of the decade. A few efforts have been focussed on the long term, but the majority have been short-term efforts. And this is not a good thing, because, as Patrick Dunne of Alliance Boots said in a recent article over on the CPO Agenda everything has to be a long-term activity. Every strategy within a Procurement world, or cost-based management as I like to call it, has to have an end-state.

In a strategic Supply Management organization, delivering a cost conscious culture is the long-term objective, everything in-between, short-term, or medium is initiatives, tactics and strategies towards that cultural change. As Daniel Baun Christensen of Lego says, there are no quick wins as such. Successful Supply Management is all about collaboration. Your customers in your organizations are your stakeholders and if you don’t get aligned there are no quick wins and long-term wins. There is no ‘one size fits all’ in procurement.

But when you engage with the larger business, as Ron Needham of SAP found out, you expand your thought leadership and do a better job of being viewed by the CEO as professionals rather than just the folks who have to save money on pencils. By working alongside the marketing, sales, and IT teams to communicate the role of Supply Management and the value it can bring, you see the stock of the internal Supply Management team increase. For example, they were able to institute a bring-your-own-device initiative, frightening to IT in terms of security and liability, which had the net effect of lowering IT spend and increasing environmental sustainability (as you no longer had executives who needed to carry work devices and home devices).

I take these quotes from the article to make a point — there is a need, and an advantage, to focussing on long term cost cutting and not just short term cost cutting. And if you truly believe that the recession is ending and this is going to be a better year, then now is the time you start. You should have started years ago, but I know that most of you reverted to, or stayed in, the cut-costs-now mentality being forced upon Supply Management by short-sighted C-Suites that should have focussed on the long-term the last time things were good instead of chasing unreasonably high profit margins to increase their Wall Street valuation.

The reality is that the 11% savings enabled by Spend Analysis and 12% through advanced sourcing / decision optimization technologies are not repeatable on the same categories year-after-year. They only deliver these savings because average contracts are 3-5 years and its typically (at least) that long before an average category comes up for evaluation again. As with auctions, savings will deteriorate unless your sourcing strategies are taken to the next level (through VFS or Collaborative strategies), and this next level requires two things:

  • supplier involvement and
  • long-term thinking.

And, unless you take your sourcing strategies to the next level (and take the first step on your next level supply management journey [registration required for download]), you may find, that in these turbulent times of rising commodity, freight, and regulatory-related supply chain costs, you may have just reached the summit of cost cutting.