global economic recession has affected just about every organisation. According
to an international survey by CPO Agenda, most CPOs are now under severe pressure to deliver cost savings and improve working capital while simultaneously attempting to preserve supplier viability.
The research, which polled 131 procurement leaders, found that 97 per cent have now been affected by the downturn in some form, compared with 76 per cent when a similar survey was undertaken last October. The pressure to reduce supply costs has also intensified, up from 76 per cent six months ago to 93 per cent now. As a result, 81 per cent have asked suppliers for price cuts – compared with 73 per cent six months ago – and 84 per cent have renegotiated contracts or enforced pricing terms within the past six months.
“We were set a challenge by the CEO as a business to reduce our cost,” says Iain Palfreman, head of sourcing at cash management company Vaultex UK.
“Our shareholders wanted costs to come down by about 5 per cent and our CEO wanted them down by another 7 per cent. There’s a lot of pressure to reduce our cost base through smarter negotiating, smarter deals and challenging the business in terms of whether they need to spend that money at all.” He is not alone; 66 per cent of CPOs have seen their savings target increase as a direct result of the recession, with 12 per cent of these saying they had been asked to increase savings by more than 15 per cent.
Generally, suppliers have had to listen to such demands. “They’re not openly willing to renegotiate pricing or terms but if we ask them to, then they’re more than willing to talk to us,” says Marty Lev, director of procurement, North America, at mobile office provider Williams Scotsman. “It’s very rare now that we talk to a vendor and for them to say they’re not doing anything.”
Sixty-six per cent of CPOs have embarked on joint cost-reduction projects with suppliers. Rick Hughes, vice-president of global purchases at Procter & Gamble, says his organisation already had an active internal cost management programme but is now looking to streamline processes in the supply chain as an alternative to asking suppliers to cut their margins. Another strategy is to focus on suppliers that have benefited from falls in commodity prices and ensure the benefits are passed on.
Many CPOs are undoubtedly thriving on a return to a more cost-focused environment but this isn’t without its downside, says Visna Lampasi, group general manager, procurement, at OneSteel Limited, based in Australia. “The business is seeking our assistance to take costs out but they also want to hold us a lot more accountable,” she says. “That’s sometimes challenging for the buyers because if the spend is shrinking some of the leverage is going away as well.”
The focus on organisations’ working capital has also increased. Three-quarters of respondents said there was more emphasis on improving cashflow and working capital, compared with 56 per cent two quarters ago, with 63 per cent having extended payment terms in 2009.
“Where we had suppliers on 30 or 45 days, we moved them to 60 days,” says Murray Dilks, head of global procurement at private equity-owned Talaris. “You’ve got to be quite tough with suppliers at this time. Clearly you’ve also got to evaluate the risk. If it’s a small company that you don’t think could manage and we’re a big part of its business, we’d look at that differently. But if we’re not generating cash we don’t exist.”
One head of procurement, who did not wish to be named, at a UK-based manufacturer, expects to have to increase payment terms in the near future but is wary of the consequences of such a policy. “I may have a different view on this to management,” he says. “I’m a bit nervous that if we just do that without careful thought we will either make things worse for our vendors and give ourselves a major problem or we’ll just undermine the trust that we have with them, which could backfire and hurt us quite badly when it comes to an upturn.”
Others, though, are paying suppliers early to help their own financial situation; 34 per cent have done so, compared with 27 per cent last October. “We have a certain liquidity that we can play with so we pay a larger amount in advance – especially when it comes to investment goods such as machinery – and expect a discount because the supplier has security that it will get its money quite fast so it will not be faced with liquidity problems,” says Philippe Erni, head of strategic procurement at electro-motor manufacturer Maxon Motor. “It’s a very good approach from our side because we can get good conditions and lose the pricing.”
Just how hard to push suppliers on cost reductions and working capital without jeopardising viability is perhaps the biggest headache for many CPOs. Three-quarters of respondents said they were either “concerned” or “very concerned” about the possibility of a key supplier failing in the next two quarters – an increase from 69 per cent six months ago – while 47 per cent have already experienced the bankruptcy of a key supplier.
“At the moment you could really drive the price down and a competitor of ours has asked everyone in the services area to go down by 20 per cent,” says Peter Dressler, senior director, purchasing and supply chain, at Infineon Technologies North America Corp.
“I’ve gone for a two-fold approach: on the one side, it’s reasonable reductions that are temporary so as soon as the economy comes back we’ll switch back to the agreed pricing. With other suppliers, we had the clear belief that for both sides the reduction should be feasible. But we always had it in mind not to use the current situation for a one-time hit, ruining the relationship with the supplier.”
Brian Schulties is vice-president, sourcing, at General Cable, based in the US (see case study, above). He says there has been a sizeable shift in his organisation’s policy away from cost-cutting to ensuring supplier health as a result of the worsening situation over the past six months. “You can drive cost down to the last penny but you have to be concerned about the supplier risk that you’ve created,” he says.
“The emphasis has changed significantly. It’s not that it wasn’t important in 2008 but it’s much more important today.”
The most popular means of monitoring supplier health is through credit agency reports, used by 80 per cent of respondents. But 73 per cent are making greater use of market intelligence, 72 per cent have stepped up communication with key suppliers and 60 per cent are gaining feedback from front-line staff as a means of spotting any signs of distress.
At Procter & Gamble, Hughes has sought information from competitors of, and vendors to, key suppliers, as well as suppliers themselves. “We have gone back a level in the supply chain to what would be our tier two and tier one suppliers because if our direct suppliers are having problems it’s probably going to show up in the materials or services they’re buying,” he says.
When it comes to mitigating the risk of key suppliers becoming unable to trade, 69 per cent said they were reducing how many single-source arrangements they have – up from 55 per cent two quarters ago – while 60 per cent were looking to switch to more stable suppliers and 50 per cent were attempting to find new suppliers in higher-risk categories. Worryingly,
5 per cent of respondents admitted they have no strategy in place to cope with this risk and 15 per cent felt their processes for evaluating, mitigating and dealing with the consequences of supplier risk were either “poor” or “very poor”.
There is evidence, too, of organisations taking greater actions to safeguard the future of key suppliers. Thirty-three per cent of those surveyed by CPO Agenda have provided direct financial support such as paying upfront or increasing volumes, while 7 per cent have invested capital in a supplier business and 3.3 per cent have acquired a failing organisation, up from 2.7 per cent at the end of 2008.
At Maxon Motor, where most suppliers are very close to the automotive industry, Erni has identified six organisations that are causing particular concern. “We’re talking to these suppliers about how we can help them,” he says. “For example, if they have a big stock of materials for us we can pay for certain amounts in advance or work out a consignment stock solution so they have the liquidity and we get an agreement where there’s a certain discount rate.”
Procter & Gamble, meanwhile, has helped to match suppliers that are looking to make investments with those in need of liquidity. “In one case we had a contract manufacturer in North America that was struggling and a packaging company that was interested in getting into the contract manufacturing business and we put the two together,” says Hughes.
“It maintained the contract manufacturer that was supplying us with over $100 million of revenue and expanded the capability of the packaging supplier to move in a different direction.”
Yet some CPOs are also worried by the prospect of rising prices and possible supply shortages in the next 12-18 months as a result of increased demand, lower capacity or reduced capital investment by suppliers. Fifty-two per cent said they were “concerned” by this prospect while a further 20 per cent said they were “very concerned”. As a result, 80 per cent are looking for alternative sources of supply or extra capacity, 58 per cent are educating business colleagues about the risk and 23 per cent are looking to forward-book existing capacity.
“Where there are markets where competitors are lost – either because they’ve folded or because they’ve decided to withdraw – that lack of competition is likely to lead to a sharp upturn in prices as soon as those suppliers that are left feel they can come in with that,” says Palfreman at Vaultex UK.
“One of our suppliers this year tried to come in with a 6.4 per cent increase with the justification of ‘because we know we can’. We managed to keep them down but they are certainly going to be looking to increase their margins.”
Other CPOs are concerned that commodity price inflation could once again become an issue. “We’ve seen a few signs of that in the past couple of months with metals and we’re trying to lock in some of our contracts in 2010,” says the UK-based head of procurement.
“But it was so extreme last year with commodity price inflation that we found ways of managing that and we don’t expect it to be anywhere near as severe as it was last year. It’s something that we’re starting to pick up a few signs of but I wouldn’t say it’s reached the top of my list of concerns yet.”
But this is an issue that more CPOs should be concerned with, despite the current favourable market conditions, says Jules Goffre, partner at AT Kearney. “People who get the timing right in certain commodity situations can make a difference of 15 to 20 per cent,” he says. “We’re convinced that in the mid-term there will be an overheating of the situation. We are going to be in a resource-constrained world for years to come.”
The onus on procurement to deliver more with less has increased in the past six months, according to the survey. Seventy-nine per cent reported a freeze on hiring new staff, compared with 60 per cent last October; 78 per cent have seen cuts in discretionary spend (68 per cent six months ago); 68 per cent have halted investment decisions (58 per cent); and 36 per cent have been forced to make staff redundant (28 per cent).
Against this backdrop, it is perhaps not surprising that there has been a marked increase in the number of respondents who feared that short-term actions might damage procurement’s longer-term attempts to add value, which increased from 35 per cent six months ago to 52 per cent.
“At the moment some of the execs want to revert to type and my challenge is to say that this is the time to prove that we will honour what we’ve been saying we’re going to do,” says Palfreman.
“We will work with suppliers to look at how we can take out real costs from the business rather than reducing their margins. This is the time that those key relationships will either fall apart or become really strong.”
Despite this, 91 per cent of CPOs felt the procurement department has coped either “well” or “very well” with the current conditions, and 90 per cent were either “confident” or “very confident” that the function would emerge from the recession in a better position to contribute value in areas such as strategic supplier relationships, innovation, sustainability and growth.
“The long-term gain is that everybody will understand how important procurement is,” says Lev at Williams Scotsman.
“I’m hoping that the successes and the programmes today are remembered so that when I go to them a year from now and say ‘I want to do this but I need to improve our systems and it’s going to cost X dollars’ that I have the support to do it.”
What the CPOs are saying
“Purchasing volumes are significantly depressed but the general downturn is forcing suppliers to remain competitive, despite the loss of economies of scale”
Vice-president, engineering, Switzerland
“The focus on the value delivered by procurement has intensified under harder economic conditions. While still facing belt-tightening measures, there is clear recognition that a business case exists for continuance of streams of procurement work, particularly accelerated sourcing programmes”
Head of procurement, manufacturing, Australia
“While the economic difficulties may peak within the next 12 to 18 months, it will take much longer for confidence to return. Suppliers will mitigate their risks with higher prices and will be much less willing to reduce prices in future”
Head of sourcing, financial services, UK
“It has been a useful environment to demonstrate to the rest of the organisation the value of the procurement function. It has also helped us to make changes that needed to happen, such as the approval of new suppliers”
Director of procurement, chemicals, Europe
“Our company is in a better position than most. We were acquired by a non-US firm that is investing heavily and growing our business. We feel very fortunate”
Senior director, strategic sourcing, pharmaceuticals, US
“We are very much into the ‘cash is king’ environment. This will damage the good customer service that has been worked upon for so long and will shelve many of the corporate responsibility projects that were in the pipeline”
Head of procurement, facilities management, UK
“Supplier service levels have suffered due to changes in supplier staff. We’re realising that automation could have provided the necessary efficiencies and are aiming to accelerate investment in systems”
Chief supply chain officer, telecommunications, Kenya
Finding the middle ground
As a wire and cable manufacturer, General Cable is heavily affected by the price of metals such as aluminium and copper, or compounds that are dependent on the derivatives of crude.
So when prices fell sharply late last year it appeared to be good news. “We went after cost, as I’m sure the rest of the market did, and were quite aggressive,” says Brian Schulties, vice-president, sourcing.
A few months later and with two suppliers having entered Chapter 11 bankruptcy, however, the focus has switched more to supplier health. General Cable has developed its own home-grown supplier scorecard, monitoring such activities as quality and
delivery performance, among others, and has implemented various strategies to help distressed suppliers.
“We’ve been able to change payment terms, with an appropriate discount, and there are also areas where we may bring in raw materials under consignment agreements so the supplier almost becomes a compounder rather than providing a finished product,” says Schulties.
General Cable is also reviewing all sole and single-source arrangements and ensuring it has alternatives for every key raw material globally, no matter how stable the supplier appears financially. “We know there’s cost associated with this strategy but we’re investing in our future by keeping the suppliers healthy, ensuring they have strong balance sheets and can provide the necessary security of supply,” adds Schulties.