Category Archives: Cost Reduction

There’s No Cost Savings If It Doesn’t Hit the P&L

Anytime costs go up — due to oil spikes, tariffs, raw material shortages, generic inflation, etc. — which is, sadly, the majority of the time — the first word out of every solution and software provider’s mouth is how their solution will generate savings … which, sadly, almost never materialize.

Yes, they show up on the sourcing award, on the new spot-buy Procurement, in the (temporary) workforce reduction from automation, etc. — but that’s not what hits the balance sheet, and definitely not what hits the profit & loss statement. What hits the balance sheet is how much actually gets paid out to obtain the products or services (not just the unit costs, but the delivery costs, including expediting when forecasts or planning is off), what gets paid for all spot-buys (including those that don’t go through RFQ but instead the first punch out with product the user wanted), and how much loss occurs when the automation doesn’t catch errors and when exceptions require hiring a FT resource at an outsourced Procurement operation to deal with them (at 3X the cost of the internal resource you let go).

The reality is that all of the “savings” the majority of software and solution providers deliver results in cost transfers to other line items in the organization, the totals on the balance sheet don’t change, and nothing hits the P&L.

Even worse, when the “savings” strategy is too aggressive, it usually results in the introduction of additional risk into the supply chain and, eventually, something breaks where the required mitigation ends up costing way more than the “savings” that was identified, which not only results in no savings hitting the balance sheet, but a significant additional expense which results in a loss on the P&L, resulting in the CFO correctly claiming that Procurement didn’t save a dime (and, in fact, somehow drove up costs), which results in the CEO claiming it’s time to bring in a new Gen-AI-based solution to cut costs and a useless Big X consulting firm to tell you how. (And we all know how that’s going to turn out!)

So if you want to ensure you stay in control of all relevant organizational spend, you need to produce results that hit the P&L. That means you need to reduce overall outlays on the balance sheet, which means you need to stop looking at short-term savings that cost more than they deliver and start looking at long-term expense reduction efforts.

The best way to do that is to prevent unnecessary expenses, not to try and shave additional margin off of categories that you have strategically sourced multiple times and are already below market and within 1% or 2% of optimal. Look for allocations that mitigate risk and the associated disruption costs. Find ways to improve forecast accuracy and balance stock to prevent stock-outs, minimize the need for expediting, and prevent overstock that will have to be liquidated later. Ignore the new hype experimental tech and instead focus on tried-and-true last generation tech that will be low cost, highly accurate, and capable of addressing the majority of your needs when you adequately define your process workflows, break them up into tasks, and identify appropriate automation tech for each task. (And if you do need AI, classic AI works best, especially when you pick classic AI designed for a specific task.)

Instead of trying to replace people with overpriced tech, focus on trying to find augmented intelligence solutions that will make your employees up to ten times as productive while allowing them to appropriately source and procure every single category. Instead of outsourcing critical or difficult categories to third parties, get your people training and, if necessary, work-along-side category experts to help them improve. Instead of using outdated methodologies to classify your categories and strategies, like the Kraljic Matrix, step up to something modern like the Busch-Lamoureux Exact Purchasing methodology which will help you understand what you truly need to be effective in each category.

In other words, don’t focus on the savings — focus on getting the spend right and overall spend will decrease, generating more savings than any single effort ever would.

It’s Time To Put An End to Business Spend Management!

Coupa may have built their Billion dollar business on it, but the time for Business Spend Management (BSM) is at an end!

Spend Management may have been the business strategy and philosophy that leaders practice and followers fail to understand according to THE PROPHET (who penned it two decades ago), but that was then, and this is now.

While spend management wasn’t supposed to be just cost management, but instead an incremental change that represents a new type of thinking, a way of taking integrated approaches to not just procurement, but all aspects of non-revenue generating operations and a way of thinking about your global supply chain strategy that would reduce costs, improve processes, and increase profits, that’s not what it became.

Spend Management became a fancy term for cost reduction (and, for the most part, that didn’t include cost avoidance), and even when optimization was used, the objective was always price. The majority of analytics focussed on spend, and even when process analytics were run, they were always framed in terms of cost and savings if automation was increased and/or process time decreased. Even multi-objective RFPs were primarily weighted on price, if they were weighted on anything else at all once basic supplier, product, and/or service requirements were met.

And now, in the age of AI (hype), all of the agentic / BS AI Employee offerings are focussed on offering you solutions to your Procurement problems that will reduce overall cost (base cost, human cost, processing cost, etc.). Cost, cost, cost.

But, for as long as it has existed, that’s never what Procurement was about. The goal might be to keep costs down, but the point of Procurement is the acquisition of a good or service. Supply, NOT Spend. Now, it’s true that the spend has to be less than what an individual would pay on his or her own to acquire the product or service or, as per Coase, there’s no reason for the business to exist, but if the business can’t acquire any products or service to allow them to offer a product or service for sale, the spend doesn’t matter.

That’s why BSM (where the “B” doesn’t necessarily mean “Business”) needs to end. It’s time to return to supply management, with guarantee of supply (not minimization of spend) at the forefront. This means a focus on risk minimization, production management, logistics management, trade management, and other variables that contribute to assurance of supply (and prevention of disruption). Costs can only be optimized once all of these other factors are taken care of.

This is the only way to procure in today’s volatile times, and, moreover, the only way to control cost. Real spend management is not just minimizing unit costs, transportation costs, and other purchase prices, but reducing operational costs across the board. You’re not reducing costs if the organization has to buy 30% off of contract because of delays, disruptions, and defects. And you’re definitely not reducing costs if you have to constantly expedite shipments, buy from alternate sources of supply at higher prices, or lose considerable revenue due to stock outs while paying for warehouse space / retail space.

It’s optimizing human intelligence against dumb automation to make sure processes are optimized, exceptions are quickly processed, risks mitigated to the extent possible, and disruptions detected and addressed as soon as they arise.

It’s Supply Management. (Not Spend Management.)

Cost Reduction … it Starts With Cost Increase

It used to be cost reduction, which was focussed on cost cutting, started with the one-trick pony of cost cutting by any means necessary, which typically took the form of e-Auctions, RFPs to new suppliers, and GPOs that could aggregate and leverage huge volumes — all tricks that are rearing their ugly heads again with the rapidly rising costs thanks to inflation, tariffs, and global instability.

They all work just fine in the short term, but they all come back to bite you in the backside in the long term. Here’s why:

  • e-Auctions: find savings by squeezing margins, and you can only take those out once, and once inflation comes back, costs go up
  • RFPs: designed just to find the absolute lowest price attracts suppliers who cut corners, underpay their staff, and offer no service while alienating your current, more trustworthy, suppliers
  • GPOs: can aggregate volumes and lower prices, but then you are dependent on them, and paying their markup … forever

None of these is the long term answer.

When we first started discussing cost reduction two decades ago, the key methods we focussed on were:

  • strategic supplier relationships and customer of choice: so that they put the effort into being your supplier of choice and finding their own ways to keep costs down (streamlined operations, better raw material sourcing, etc.)
  • supplier investment and development: if the supplier is smaller, or not as advanced, they’ll only do so much on their own, so your efforts to invest, improve, and guide them (through early payments, low-cost new line financing, etc.) could greatly lower your costs over a multi-year engagement
  • strategic sourcing decision optimization: where you did a multi-objective optimization that took all of the cost factors (unit, transportation, warranty, service, waste etc.) into account as well as risk (that could cause “savings” to evaporate over night) and quantitative assessments of other key factors

And those are all good techniques in (semi) normal times. But these are not (semi) normal times. These are almost unprecedented times. Between natural disasters, geo-political conflicts and wars, and terrorism, we are dealing with unprecedented simultaneous reductions and closures of major maritime shipping lanes (the Panama Canal, the Red Sea, the Strait of Hormuz), unstable (and rapidly escalating) fuel costs, regular supplier and carrier failures, unpredictable crop and raw material availability, etc. all at the same time. Old friends becoming foes, or at least frenemies; friend-shoring, near-shoring, and home-shoring finally gaining ground (despite being promoted and the right answer for decades); and supply chains being swapped whenever possible.

We’re in times where these techniques, while still good, can’t always address all of the situations. Plus, if you’re constantly adapting to what’s available now, versus focussing on what you should be building, you’ll be in a constant, unstable, state of affairs, caught off guard with every flux, and constantly on the brink of ruin.

You need to stop working sourcing event to sourcing event, procurement to procurement, and disruption to disruption and start working on transforming your supply chain to a more resilient long term supply chain. This will require identifying which safe countries and regions (likely to have long term geo-political and trade stability with your home and/or destination countries) you should be doing business with, where solid supply bases could be, and how you could construct a real supply chain from the source countries to the destination countries that don’t depend on unstable source points.

Then you have to engage the carriers, find partners to help you manage the export and import requirements and take advantage of FTZs (free trade zones), build or acquire intermediate warehouses and cross-docks, and be ready for trade with the local suppliers. Those will typically include multiple suppliers you are not currently working with, and they may need to upgrade their production lines, operations, services, etc. to serve you to your level of expectation. This will incur costs that your suppliers and partners will need to incur, which will need to be passed onto you. Which means, in the short-to-mid-term, your costs will increase. But if you design the right, stable, supply chain networks that you can use for years (or decades), develop the right suppliers, and maintain volumes, as operations improve, up-front costs get amortized, and economies of scale get optimized, costs will go down, and with long-term agreements, over multiple years, your company will see previously unrealized savings while your peers see their costs go through the roof.

So if you want to save money, you better be prepared to spend.

Supply Chain 2026 or Supply Chain 2008? Part I

Continuing on our “the more things change, the more things stay the same” theme, back in 2008, the Supply Chain Digest published an article on Key Trends Impacting Supply Chain Management and Logistics for 2008 where it asked a number of leading academics and practitioners what they saw coming. (Their responses are summarized in this SI post.)

Nine (9) experts weighed in and provided 24 thoughts on what they saw coming in 2008. Those thoughts more-or-less fell into seven themes, and for the most part, those themes are the same themes today. Moreover, the specific concepts addressed are more-or-less the concepts being addressed today. Let’s take them theme by theme.

Delivered Cost

Four (4) of the nine (9) experts centered on cost as a core theme and stated that they believed:

  • total delivered cost will take hold as a concept
  • The required cross-functional focus needed to reduce costs will not get its due in most organizations
  • The firms that recognize that a fresh approach focussed on value, cash flow, and light, non-intrusive, web-service-based, value-add software components that work with existing solutions and technologies will be the ones that make progress
  • There will be an extensive focus on controlling oil and logistics costs
  • Businesses will start to understand that supply chain efficiency is linked to price.

Total delivered cost is still a major theme today with the tariff mania, the steep price hikes in certain categories and shipping with the Red Sea and Strait of Hormuz issues, and the increasingly price-sensitive consumer economy that is cash strapped as a result of so many essentials skyrocketing in price that is putting extra pressure on manufacturers, distributors, and retailers to keep costs down across the board.

Furthermore, in organizations that have already implemented reasonably modern procurement, logistics, and supply chain solutions, and achieved some process and cost savings, the only way they are going to get the next level of savings is with cross-functional coordination — reducing overstock and stock-outs; streamlining shop-floor procurement (from central warehouses and suppliers) with automation across manufacturing, logistics, supply chain, and procurement; etc.

The best results always involve identifying where automation and augmented intelligence can increase process efficiency and help identify more savings.

Oil and logistics costs are again at the forefront.

Finally, businesses have always known that supply chain efficiency is always linked to price. Business exists for Procurement, and it only continues to exist if it is more efficient in Procurement than individuals acting on their own.

Strategy/Models

Four (4) of the nine (9) experts also centered on cost as a core theme and stated that they believed:

  • Strategy will become more important
  • Companies will re-examine their strategic supply chain design decisions with regards to outsourcing
  • Software and Service Provider Business Models will Continue to Change
  • SCM organizations will have to focus more time and effort on tactical and operational issues driven by economic and competitive pressures

Strategy is becoming more important by the day as the rate of man-made disasters exceeds even natural ones, which have increased five fold over the last couple of decades. Especially with an AI-Hype induced market crash coming.

As a result of the tariff mania, companies are finally reconsidering their outsourcing and seriously looking for friendly sourcing, near sourcing, and home sourcing options where they have the opportunity to do so. For complex electronics or manufactured components that can only be produced in a few factories in the world, companies don’t have any choice but to outsource for those components but they are rethinking where final production takes place and then importing just what they need into select destinations.

The reality is that the fundamental capabilities of the vast majority of today’s software offerings are not that much different than the fundamental capabilities of the same software 20 years ago. The only difference: true multi-tenant cloud SaaS, hundreds of features you probably don’t use, greatly improved user interfaces, and more data to power them. Not counting Gen-AI, which is not reliable anyway, earlier versions of every other AI tech existed 20 years ago. And maybe the processing power wasn’t available to the average user or corporation, but the tech was there. However, most business apps don’t need AI, and all of the core procurement, supply chain, logistics, production, etc. functionality was there 20 years ago. Integration wasn’t out of the box, sometimes took forever to get basic data transfer between systems, and often happened just in time for a system upgrade. And the workflows were often so clunky it would take days to do what should take about an hour. Thus, since no one wants to buy the same stuff over and over, you need to change the business model to make it happen. Also, most consultants sell the same playbook for at least a decade, so they need to change the business model to hook you over and over.

The constant changing economic landscape as a result of tariff mania, the intermittent availability of straits and canals that change on a daily basis, the sanction wars, and other constant turmoil is forcing tactical and operational issues driven by economic pressure to the forefront.