Mr, buyright – getting procurement right

So unpredictable are revenue streams these days that it is a
nightmare trying to keep matching costs under control. No industry wants to
mimic the auto trade, with its aerial photographs of countless acres of car
parking space, overflowing with unsold vehicles.

A recent Insider Business roundtable discussion talked about the
problems of managing the cost base. Eric Tracey, ­ who has an enviable (if
stressful) track record as a ‘turnaround’ finance director in organisations such
as Amey and Wembley plc, and who is now senior non-exec director at Chloride, ­
advised participants to think about what sort of scenarios might pan out. “You
have to be prepared to shift from managing ‘desired scenario A’ to ‘not so good
scenario B’ to ‘pretty horrible scenarios C, D and E’,” he said. “Then you have
to totally understand what the drivers for those costs are: which costs can you
take out without damaging the business ­ it is all too easy to do that.”

James Fillingham, a partner with PricewaterhouseCoopers, agreed, but added
this warning: “People often start in the most obvious places first: they often
cut what is easy to cut, not necessarily what is right to cut, so they might
start with discretionary marketing.”

Avoiding mistakes
Fellow panellist James Rowlands, FD of Liken Group, was even more emphatic:
“Easy cuts are a mistake. It’s a trap.” He had a useful tip: look back at what
the cost base was when the revenue was lower than it is now. “It’s quite
important to look at what a business was doing with its costs during the growth
period because the chances are that that is where the mistakes lie,” Rowlands
says. “That is where the overspend lies.

The lack of efficiency has evolved, maybe in the way stock is being managed
and purchased or there may be particular issues around software and IT assets.
These sorts of areas can be a real goldmine in terms of improving efficiency
without necessarily impacting the productivity of the business.”

Of course, one of the ways in which companies can get to grips with their
costs is to be more careful about buying stuff. Two more roundtables looked at
procurement issues and, again, one of them was an Insider Business
discussion. One topic discussed was the financial supply chain, the critical
cash-related issues relating to suppliers (and customers): Are they financially
sound? Do they rely on external finance? Is credit insurance available to cover
them? Can or should financing arrangements be put in place by the buyer? “In
this particular economic downturn, purchasing managers and credit managers have
got to look beyond just the credit scores or the financial performance of
companies, upstream and downstream,” said Martin Williams, managing director of
Graydon UK.

Better buying comes down to more than just screwing down on the price and
making sure your supplier isn’t about to go bust, however. David Rae, editor of
Procurement Leaders (and a former deputy editor of Financial
Director), said that procurement needs to be brought into decision-making
right at the very beginning. “If research and development says, ‘We’ve got this
new product: go out and find where we can get the bits we need,’ then that’s not
good enough. They need to be involved from the beginning.”

In a separate roundtable organised by Procurement Leaders, Hugo Eckseler,
chief procurement officer at Deutsche Post DHL, said that finance and
procurement were becoming more closely aligned, in large part because of the
FD’s increasing interest in cash, but also because of the financial supply chain
issues. He added that “the current environment is an opportunity” to bring
finance and procurement closer together.

Strategic role
This goal is at odds with the current reality, according to research presented
at the roundtable by procurement consultants 4C Associates. It said, “A dis
connect exists between procurement and the overall company strategy, leading to
a conflict of objectives… If procurement is not involved in the development of
corporate strategy, then they will not be structurally able to maximise value
for the business.”

The procurement profession more usually brings to mind cartoon character
Bristow (“18th in line for chief buyer at the Chester-Perry Organisation”). In
fact, procurement’s low level of representation at the board table is regarded
as an obstacle to raising the importance of procurement as a strategic function
and a value-adding profession.

Johan Denekamp, CEO of 4C Associates, said there were important career issues
for procurement managers: if the best talent is to be recruited into the
profession ­ and Eckseler had pointed out that graduates showed virtually no
interest in a career in procurement ­ then there needs to be a clearer route to
the very top of the organisation. Then, so the thinking goes, an organisation
will buy as intelligently as it creates and sells.

Our audiocast discussions can be downloaded at
www.insiderbusinessclub.com