Cost cutting – a Warning

This month’s SM provided confirmation that, amongst 3000 respondents, cost-cutting was their #1 priority for 2012. It would be a foolish professional who suggested that this topic was ever going to be eliminated from the role of the buyer. It has always been of critical importance and always will be, as long as organisations are competing to provide the best value products and services into a value-conscious marketplace.

I wouldn’t disagree with the opinions of so many professionals, but I will add a warning; familiar to some but nevertheless important to those that equate organisational influence and status with savings delivery. To illustrate, elsewhere in SM this month another commentator suggests that the ‘relentless focus on cost efficiencies (is creating) a once in a generation opportunity (for procurement) to influence and shape the direction of business’ (see ‘Soapbox’ p20).

One of the bi-products of an increased focus on cost reduction is that procurement can easily find itself defined by its ability to deliver savings. I’ve seen it several times where year-on-year savings are delivered by inspiring procurement leaders and enthusiastic teams, only to find they face increasing demands by avaricious CFOs, who have failed to mobilise the whole business to achieve improvement; reverting to Procurement to get the business out of a financial hole. At this point, many procurement leaders seek pastures new.

Simply focus on cost and not only do you box yourself in but, if cost cutting does not reflect the total cost of what is being procured, then value erodes, and total costs rise. Ever made a savings killing, only to find the supplier is unable to meet your specification or deliver to schedule? Procurement teams, ever desperate to hit increasingly–challenging savings targets, do not always make good bedfellows of stakeholders looking to create a sustainable competitive edge for their organisation.

So, for the aspiring procurement professional, don’t smugly accept the pat on the back for delivering savings alone; recognise that it is largely a game of diminishing returns. Instead continue to focus on the whole spectrum of value (cost, performance, innovation, speed-to-market, etc.) that the supply chain is and could deliver to your businesses’ customers. The results may well be more sustainable than ‘mere’ savings and, you might keep your job in the long-term, and your business successful.

This blog was first published in Supply Management magazine in January 2012.

By David Atkinson

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