Hot Topic - Cost Savings and Value Acquisition

HOT TOPIC: "Don't be seduced by Savings: it's Profitable Survival that counts."

There is a persistent, macho and life-threatening tendency to promote procurement's importance in terms of the money it spends (the bigger the better!) and its impact by citing cost savings. Really! This is the mindset of a function determined to drive itself into extinction. Clearly cost is an issue … however not as a negative aspect of business to be minimised, but more in terms of the positive value created by 'investing' costs in supply markets. Assuming that a reliable operating process exists (from sources, through internal operations and out to customers), then sustained profit comes from getting supply costs, internal costs and sales income all into the same equation and creating a net positive outcome.

The late Lord Weinstock of hugely-successful GEC knew this. He understood how to synchronise internal and external relationships. Quote "The secret is to see what the market will pay for a product. You then see if you can manufacture at that price. You then work out what you can get off the costs by squeezing a discount out of the suppliers …and that is your profit." OK, maybe this is too price-oriented for fancy modern thinking but it reflects the reality of the firm: "we buy, we transform and we sell."

Procurement is not a service activity but about ensuring that the supply markets needed by a company do actually exist; behave in every respect as we wish them to; and open their doors to us. Skill, acumen, influence and strategy are needed to achieve this. However, to catch the eye, we tell this story in terms of the total money spent and its cost saving potential. We get the licence to embark on change and start delivering. The search for cost savings intensifies and top management has eyes for nothing else.

But cost saving is a two-edged sword. I understand why the initial emphasis of 'change' is on savings but, in 12 -18 month's from starting to generate them, the quick wins dry up. So it's important, during this time, to shift the management reporting spotlight away from savings and on to whether or not the procurement process is ensuring that the company's externally-supplied life-giving resources are being successfully acquired at the cost required by the financial plan. So long as the financial plan is challenging and strategically inspired, then performance versus these real-time targets is the credible way to measure progress, not chasing isolated cost savings which may or may not find their way to the bottom line. And if we then strive for supplier-led innovation to be channelled preferentially to us then we secure further value in the form of competitive advantage and contributions to the top line, but that's another story.

Our position on Cost Savings and Value Acquisition

Agile, enlightened, procurement is not about cutting costs but instead seeks to create maximum value for expenditures made in the supply market. Initially, tangible benefits arising from a change programme to increase its impact do indeed take the form of cost savings, but if this is all that is intended then this is all that will happen, and the possibilities will be quickly exhausted. If cost saving reporting is required, do it … but simultaneously use the opportunity to broaden the message and raise top management's perceptions to new heights.

Far more will be gained by viewing 'agile procurement' as a mind-set rather than a cost reduction mechanism. All businesses face opportunities and challenges. The 'agile' way is to say "how can our suppliers help us to succeed here?" … and conversely to counter the effects of hostile market behaviour, poor performance of suppliers and supply chains, and dysfunctional behaviour inside the company.
© R C Russill / November 2004