4 Sourcing Strategies During a Downturn
The global recession has added pressure on procurement departments to perform with fewer resources. Consider these four tactics to survive the economic slump.
As companies face one of the toughest markets in years, chief procurement officers (CPOs) are now under more pressure to keep costs low and accomplish more with fewer resources. A recent survey by Accenture found that 59 percent of CPOs questioned felt they were under greater pressure to perform and the same percentage reported an increase in their savings targets.
Due to new priorities, 73 percent were focusing more on suppliers and 64 percent were getting involved in new areas and projects within the company, the report notes. At the same time, 41 percent had their teams reduced, with 5 percent seeing a downsize of 15 percent or more.
To help CPOs cope with the challenges caused by the recession, CPO Agenda presents these key strategies for doing more with less.
Prioritize Workloads/Increase Staff Productivity
For many CPOs who now have to work with a smaller staff, it is important to allocate work appropriately between team members and ensure they are working productively. Jim Nelles, a former procurement head and current partner at Roland Berger Strategy Consultants, tells CPO Agenda that CPOs must use team resources as effectively as possible and understand where finite resources will bring the best results for the business as a whole.
He cites an example of one person looking after a budget of several billion dollars because it's with only one or two suppliers with few specifications, rather than someone looking after a budget of merely $100 million but dealing with 50 different suppliers on multiple continents. Although dealing with less monetarily, it is more important to shift more resources to the latter to deal with the volume of work.
CPO Agenda also advises CPOs to cut down on redundant activities and restructure the procurement team if necessary. Dan Morrissey, director of global procurement at Abbott Nutrition, told CPO Agenda that he hopes to overcome this issue by automating some operational tasks to remove junior positions and reinvest the savings into more experienced staff.
Maximize Technology
Accenture's research also found that 46 percent of CPOs saw a decrease in their technology budgets this year. As such, many will have to make do with less and must squeeze more value out of their current systems, CPO Agenda says. To do so, sourcing experts told George Colony, CEO of Forrester Research, on The Counterintuitive CEO blog, that CPOs should consider cutting maintenance contracts on mature or non-critical software to lower costs. They also advised to "stop constant, unnecessary updates" and "cancel or re-negotiate perpetual licenses." Lastly, make use of blogs or other social technologies to create vendor management transparency.
CPOs should also look at their e-procurement systems for opportunities to get more value. One company found the use of e-auctions to be particularly productive, CPO Agenda reports. In 2008, the company was able to put on 8,000 to 9,000 e-sourcing events in more than 50 countries.
Oracle suggests eliminating paper invoices and switching to electronic files to more easily reap early-payment discounts, as these can total 2 percent or more of the purchase price. Use Web-based supplier self-service portals to provide electronic ordering, shipping and invoicing, Oracle says. Having the "right mix of strategic sourcing technologies and policies" makes online negotiations faster and more effective, with savings ranging from 5 percent to 50 percent.
Stop Maverick Buying and Reassess Spend Priorities
E-procurement systems and purchasing cards can help cut down on maverick buying, CPO Agenda says, by having the procurement team follow certain processes and cutting unnecessary expenses. Adding a self-service electronic requisition tool can help reduce unnecessary and off-contract buying as well, Oracle adds.
Now is also the time to cut weak, superfluous vendors, The Counterintuitive CEO blog says. Companies should also mandate the sourcing strategy and make it stick. Part of this involves reassessing the company's spending priorities. Supply Excellence says that now is "a great time to source labor dependent services" and that this is "the best sourcing market we have seen in years."
Supply Excellence notes that for direct materials, companies should consider restructuring contracts, implementing price adjustment clauses and accelerating their sourcing/re-sourcing efforts. For logistics, CPOs should take advantage of the availability capacity in the market and lock in competitive rates. For indirect spend, aggressively source all categories including non-traditional spend areas, Supply Excellence says. "Unlike some direct materials categories that may require specific approval processes, many of these savings can be implemented immediately."
Improving the buying strategy can reduce costs by 5 percent, which can result in a 50 percent profit improvement, the Sourcing Innovation blog adds.
Outsource Non-critical Activities
Diminished resources and the need to focus on core expenditures has CPOs, particularly in manufacturing, looking at outsourcing indirect procurement, CPO Agenda says. "They might not outsource the whole source-to-pay process but they are looking for managed service providers to wrap more services into their portfolio," Accenture told CPO Agenda.
According to U.S. group purchasing organization Corporate United, the recession has been partly responsible for its 20 percent growth in 2008. Having an organization negotiate contract discounts with selected suppliers "gives companies the confidence that they're achieving savings while being able to redirect whatever limited resources they have," Corporate United Vice President David Clevenger said.
While there are plenty of difficulties during a recession, there are also opportunities for streamlining and improving the sourcing process as mentioned above. How is your company's procurement team handling these difficult times? Share your best practices tips in the comments section.
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