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Economic downturn

Smart strategies for tough times

CPOs are focusing on getting the right mix of talent and greater efficiency as they seek to respond to the unparalleled demands of the recession

 

 

August 2009

 

By Andrew Bartolini

 

 

 

The global recession is taking no prisoners. No industry, region or company has been immune. Most business functions have been impacted.

 

For many companies the best opportunities and top priorities in this business cycle play to the strengths and expertise of its procurement department, and CEOs are taking notice.

 

“We intend to operate with strict financial discipline, maintaining a maniacal focus on cash. We’re also closely managing all of our costs, renegotiating contracts around the world and localising our sourcing,” said PepsiCo’s Indra Nooyi, one of a growing number of CEOs who have highlighted the success of their procurement-led initiatives during their most recent earnings call.

 

With the attention of the CEO, CPOs have a host of business pressures driving them to action, led by the need to identify cost reductions, which was selected by 91 per cent of procurement leaders as a top-three pressure in Aberdeen’s recent The CPO’s Agenda 2009 study; a level unprecedented across a decade of research (mitigating supply risk, identified by 47 per cent was the second highest pressure).

 

Given the heightened pressure to deliver savings, it is no surprise that the top CPO action for 2009 is to increase sourcing activity (see Figure 1). The broad-based commodity bubble that burst in 2008, coupled with diminishing demand across a wide range of categories, has created an extraordinary window to source new or renegotiate current contracts for a significant percentage of both direct and indirect spend.

 

Yet cost reductions from sourcing is not the only focus for procurement this year. Best-in-class CPOs (defined by Aberdeen as the top 20 per cent of performers) are nearly as focused on developing strategies to improve cash as they are on sourcing. Extending payment terms is one common strategy but can place direct cash flow pressures on suppliers struggling with their own liquidity issues. CPOs are also managing internal demand or usage of categories by changes in policy or approach as a way to preserve cash.

 

 

 

 

A positive from the business downturn is that supply risk is no longer the “elephant in the room” and is finally garnering the attention of senior buyers who realise their push for improved pricing amid a reduction in demand can have a doubly adverse effect on their suppliers.

 

With 71 per cent of CPOs reporting an increase in the level of risk in their supply base, but only 30 per cent of enterprises having a formal supply risk programme, many CPOs are taking action to close this gap and starting to define supply risk metrics, develop contingency plans and leverage external sources for support in programme development and management.

 

Response strategies

The recession has impacted the plans of many CPOs in 2009: 48 per cent of CPOs are working with decreased operating budgets compared to last year; 55 per centhave delayed major initiatives and 32 per cent are expecting headcount reductions. In the face of intense pressure, operational challenges and pervasive uncertainty, a steady hand is required to ensure that long-term goals are not undercut by the response to near-term pressures.

 

The modern CPO understands that the proper blend of talented people, efficient processes and enabling technology is needed to achieve a broad procurement transformation and that achieving the desired mix is as much an iterative process as it is an incremental one.

 

To that end, CPOs in 2009 are putting their people first, above all other strategic initiatives (see Figure 2). The scope and success of the procurement department can only scale to a level that its people can support so, if the management of spend is truly a value-added activity, investing in “spend managers” and actively trying to manage more spend both make good sense.

 

 

When the economy recovers, as it inevitably will, CPO priorities may expand from a narrower focus on cost and cash to a broader set of supply management initiatives including innovation, quality and supplier performance, while top enterprise priorities may also shift away from procurement.

 

For now, CPOs with a firm command of the goals of the larger enterprise, a clear vision and plan focused on supporting or achieving these goals, and an organisation that is well equipped to execute said plan stand poised and ready to lead their enterprises out of this economic cycle and into the next decade. This is not a time for the meek-hearted.

  

 


 Andrew Bartolini (andrew.bartolini@aberdeen.com) is vice president and group director of Aberdeen Group’s global supply management practice in Boston, Massachusetts 

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