There is no better time to be talking to your procurement department than in a recession

The past 12 months in the business world has brought us a constant diet of bad news, turmoil and uncertainty. Indeed, the situation we are currently in is of such an unprecedented nature that nobody really seems to know where to start when it comes to addressing the issues facing the country. The Government and Bank of England have been central figures in all of our lives in the last year and no doubt will continue to be for the foreseeable future but even they are not able to provide an easy answer, as the debates about interest rates and the ‘bail outs’ of the banks illustrate.

As the news gets even more remarkable by the week, pity then the poor procurement professional. On his shoulders lays a heavy burden of expectation to conjure up deals which not only remove great chunks of expenditure from their company’s bottom line, but simultaneously drive up service quality and secure continuity of supply.

What is a Procurement Professional?

Procurement itself can be thought of in terms of your own everyday lives; most days you will make a decision whether to purchase something depending on your need (or desire) for it, its price and its quality, features or functionality. The balance of all of these things wrapped together essentially represents its value to you and based upon this value you’ll choose where to buy it from or to not buy it at all. Your personal perception of value will therefore differ from other peoples, especially those with either a greater need for it or greater ability to afford it!

Procurement in the corporate world is really no different to this, although naturally comes with greater complexity and usually many different opinions to canvass and satisfy.

The basic role of the procurement professional is to manage the purchasing process. Broadly speaking, this starts with the articulation of the organisations requirements, through the assessment of the supply market, to the final selection of supplier who can satisfy the requirements and represents best ‘value’. Challenging the business requirements so that absolute ‘must haves’ are weeded out from the ‘would really likes’ is a key part of this process, something which most of us will probably find has parallels on a domestic front.

Reducing Costs

So while Procurement is about much more than simply negotiating the lowest price for something, in the current economic climate there is clearly a great opportunity for organisations to review their cost base and identify cost reduction opportunities.

In the current situation, there is clearly a driver for companies to do everything they possibly can to reduce their expenditure and thereby improve their profitability. Benefits derived from procurement cost reduction exercises can go straight to the bottom line P&L and so are understandably are high on the agenda for any CFO or CEO.

Secondly, the current market means that suppliers are ultra keen to win new business and will price their goods or services aggressively to do so. In competitive tender situations, suppliers have to compete hard against one another to win new contracts with the obvious consequence that the price to the buyer is coming down. This also applies to suppliers wanting to retain existing business or agree contract renewals.

Best Pricing

We’ve all seen the result of keen competition playing itself out on the high street in recent months. The basic principles of supply and demand meant that even those organised enough to be doing their Christmas shopping in October were able to take advantage of the traditional ‘January sales’, with discounts in virtually ever shop. Indeed, anybody who is in the market for a new television, or even a new car, at the moment will probably find there is never a better time to get a great deal.

In the business environment, we are increasingly seeing suppliers reduce their charges to their lowest sustainable levels. To accelerate pricing negotiations and obtain best possible pricing, we frequently use “eAuctions”. These are effectively online reverse auctions where each supplier has visibility of the other bidders pricing proposals in a timed auction event, with each supplier able to reduce their pricing in reaction to their competitors’ positions. By the end of the event, the aim is that you will have each supplier’s absolute best pricing on the table from which to make your final decision.

In a highly competitive situation such as this, pricing from a number of suppliers can often converge to a very similar position. Where this occurs, the buying organisation can allow quality based criteria to take greater priority in their final buying decision safe in the knowledge that financial savings have been achieved whichever supplier they choose.

Maintaining service quality

The balance to be found for procurement professionals is in maximising these cost saving opportunities whilst ensuring the quality of service, and relationship with the supplier, is maintained. If suppliers cut their margins too tightly, you can easily find that they start cutting corners in the delivery of your service in order to recover lost ground, significantly impacting the ‘value’ you were anticipating.

An even bigger risk to seriously contemplate is that of suppliers potentially going out of business. With corporate insolvencies increasing significantly last year, it is important that organisations understand the real impacts on them if suppliers are to suddenly disappear. Admittedly, the demise of your stationery provider is not likely to bring your organisation to its knees, but think of the impact, for example, if the company who run your payroll processes went out of business.

Away from financial services, manufacturing companies are typically smart enough to ensure that they have a dual source of supply for all of their raw materials. Dell, for example, would always maintain strong strategic relationships with at least two suppliers for all of their component parts. Not only does this keep a healthy competitiveness in terms of price, innovation and product development, but it also protects Dell against a faulty product line from one of its suppliers or the situation where a supplier may go bust.

Some companies would go to even greater lengths to ensure continuity of supply in the event suppliers are in financial trouble. This could be in the form of directly purchasing raw materials themselves from further down the supply chain in order to overcome a suppliers cash flow difficulties, or even acquiring a key supplier to keep it afloat and maintain the service provision short term.

Supplier relationships

The strength of ongoing relationships with suppliers can be severely tested in periods where the upper hand lies strongly with one party or the other.

For example, in recent years HR departments, especially within financial services companies, have struggled to obtain IT contractors with particular rare skills without having to pay inflated daily rates and agency fees. Whilst this has meant boom time for many agencies while demand has been high, clearly the opposite situation is in effect at the moment. Even during the early part of last year many of the large banks were unilaterally informing their suppliers that daily rates and/or agency fees would be reduced by 10% or more, with agencies and contractors finding themselves in no position to object.

In a market such as this one that is very cyclical, a greater emphasis placed on developing and maintaining strong relationships with selected partners can reap significant rewards. With a trusting relationship carefully cultivated over time, it would be fair to expect that an agency treated with respect and understanding in today’s market may well repay you with extra attention and effort when finding that scarce resource at the right price when things are more buoyant. Finding ways to motivate both client and supplier to achieve the same goals can be difficult, but is ultimately very rewarding.

HR departments may well find there are other areas of expenditure which can be reviewed at this moment in time, with savings from suppliers helping to ease the pressure on the departmental budget. For example, a training provider coming towards the end of a current contract may be able to sharpen their pencils when reviewing the annual charges in return for your continued business and an extended contract. Maintaining a strong client base and certainty of future revenues will certainly be of such primary importance that there will be greater flexibility on their margins.

Carrot or Stick?

Being used to seeing dramatically reduced prices on the high street, it would be easy to have the same expectation of blanket cost reductions in the corporate world. And whilst all companies should undoubtedly be reviewing their cost base very closely and taking action to reduce these costs wherever possible, it needs to be done with the bigger picture in sharp focus.

For instance, a constructive conversation with a key supplier who is experiencing liquidity and cash flow issues might provide an opportunity to negotiate a better pricing structure in return for quicker payment terms. Long term, this should result in a stronger relationship with a supplier who has now reduced their charges, and short term helps protect the supplier from financial difficulty thus providing you with continuity of supply for your important service and no disruption to your own business.

Of course all supplier relationships have their own particular circumstances, some of which require gentle nurturing and lots of TLC and others which more frequently need a pointy pair of shoes and some occasional ‘encouragement’.

Obtaining cost reductions in the current climate should absolutely be a priority for almost all companies right now. There is a great opportunity for procurement teams to make a real and significant impact at board level through delivery of cost savings which make a telling contribution to the well being of their firms. Doing so successfully, while protecting the long term relationships and reputation of your company, will mean finding the right balance between those pointy shoes and the kid gloves.

“Companies need to recruit and train people in whom they have confidence and whom they can trust. It is confidence and trust that are real safeguards against fraud and disaster, and they can only be fostered and instilled on a sound ethical basis”

Sir Adrian Cadbury, Committee on the Financial Aspects of Corporate Governance, 2002

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