One of the world’s leading CPOs has warned of the dangers of aggressive “price attack” tactics by procurement functions during this recession.
Rick Hughes, vice-president of global purchases at Procter & Gamble (pictured), said insisting on unilateral price cuts in an attempt to improve your company’s financial position was “a very dangerous proposition in the short term as well as in the long term”.
Speaking during a webcast organised by CPO Agenda, Hughes said the last time P&G had adopted such a strategy was in the late 1990s. While this had delivered “several million dollars”, it was only about 5 per cent of what the company had expected to achieve.
“It didn’t prove very beneficial,” he said, “and in today’s environment I suspect that if we did that we’d cause some additional suppliers to have financial or liquidity problems... and in some cases maybe even go into insolvency.”
For these reasons, Hughes explained, he and his team had chosen not to pursue a price-attack strategy this time around, despite being under pressure from the consumer goods firm’s leaders to deliver cost improvements.
Fellow panelist Paul Massih, vice-president of contracting and procurement strategy at oil giant Shell, said his team had come to the same view – in contrast to that of rival BP, which last month announced it would increase the pressure on key suppliers to lower their prices.
“We went through this a number of times and the lessons learned are that you will gain in the short term but you will destroy the long term, especially in our industry where we depend hugely on human capital and human ingenuity.”
Tom Rae, group director of procurement at NSG Group, one of the world’s leading glass makers and owner of the Pilkington brand, said his team were pushing for price reductions in energy and commodities where market prices had come down, and in non-critical categories.
With 90 per cent of the company’s sales in automotive and construction – two of the sectors pummelled by the downturn – procurement was in spotlight and had to deliver results. But pressuring its top 30 or so strategic suppliers for price cuts was not an option, Rae said.
“We would never, ever apply a price-attack approach in such categories, because these guys are incredibly important to us in the long term... we have to find ways to cut costs without damaging relationships – and being consistent in the relationships we are trying to build.”
Rae added that 14 of NSG’s “significant” suppliers – those where re-sourcing was difficult – had gone bust in the past six months. Of these, “probably more than half hadn’t appeared on our radar screens,” he admitted.
Conventional risk management methods had proved inadequate in predicting supplier failure, Rae said. “In the heat of battle, we’ve learned that some of the tools that we thought were going to protect us haven’t.”