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Formerly CPO Agenda

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Supply chains hold the key to cost cutting

20 February 2009


by Geraint John


Supply chain functions offer the biggest source of cost reduction during the recession, according to a global survey of business leaders.


Fifty-eight per cent of the 337 senior executives questioned by Ernst & Young in January said their supply chains provided major opportunities to lower costs, against 17 per cent saying little or none.


Operations was narrowly behind, on 57 per cent, but only 15 per cent of executives rated the savings here as “significant”, compared with 25 per cent for supply chain.


In third place was IT, on 43 per cent, followed by sales and marketing (41 per cent), R&D and mergers and acquisitions (both on 34 per cent) and sustainability (28 per cent).


The report, Opportunities in Adversity, published this week, found that more than eight out of 10 companies had already conducted a broad cost savings analysis. Sixty per cent had started to reduce headcount, 44 per cent had cut IT spending and 42 per cent had targeted employee benefits.


Among other options being considered in response to the economic downturn, 31 per cent of respondents said they planned to move operations to lower-cost locations during 2009, while the same number said they would increase their use of outsourcing.


But there was a mixed picture when it came to suppliers. Although 46 per cent said they had reduced the size of their supply bases in a bid to get more favourable pricing, 42 per cent had done the opposite to mitigate against the risk of supplier failure.


Companies needed to balance cost cutting with other initiatives such as efficiency and process improvement, the report suggested.


“Research from previous recessions has shown that companies that will emerge the strongest will be those that clearly identified opportunities to sustain their development during the downturn and that took strategic decisions that distinguished them from their competitors,” said Steve Varley, head of advisory at Ernst & Young.


A separate report published this month by sourceforconsulting.com, an online portal, noted that cost-cutting efforts often proved to be unsustainable. One reason was poor co-ordination between different functions and business divisions.


“[Managers] fail to see that cutting costs in one area may increase them elsewhere, and allow costs to creep back up once the immediate crisis is over.”


The report, Intelligent Cost-Cutting, went on to argue that a careful use of consultants could save firms 10 per cent or more in specific areas.


Objectivity, focus and speed were among the benefits consultants could bring to cost-saving programmes, it said.


However, there are growing signs that companies are reducing their use of consultants, as they cut discretionary spend to conserve cash.


Earlier this month, Siemens, the German engineering group, announced a blanket ban on consultants, with CEO approval required for future spending.




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