Archive for January 16th, 2009

Consulting Conundrums that often Create Considerable Consternation.

Friday, January 16th, 2009

The letter “C” can be so important. This author has always believed and in fact has written that C- level management needs to be more involved in the procurement process. That is the conundrum.

According to Merriam-Webster a conundrum is a riddle whose answer is or involves a pun or 2 a: a question or problem having only a conjectural answer b: an intricate and difficult problem.

So what is the conundrum in retail procurement that creates so much consternation, with consternation according to wiktionary simply being amazement or horror that confounds the faculties?

Now to the detail. When a solutions company in the procurement space calls on a retailer and opens the meeting with “we can increase your earnings by as much as 100% and do it in the current fiscal year”, why in the world would the answer from any associate and certainly the executive suite not be? “Show me how.”

My company would accept this challenge with the following logic. The single-largest opportunity to improve net income is by addressing the largest line on the P&L which is the cost of goods and services. The good news is that every dollar reduction in COGS falls directly to the bottom line. The finance department may argue that there are supplier related switching and timing costs incurred in order to get to the true savings, but the majority of these savings end up on the bottom line.

Let’s do some simple math: a five billion dollar ($5B) supermarket company has an approximate cost of goods of $3.6B. Assuming a net income of one percent (1%) this retailer would have earnings of $50M. Let’s assume that they assigned fifteen percent (15%) of their total above the gross margin line spend to next generation e-procurement tools. This would be approximately $540M. Assuming a savings of 10% which is well below documented savings within the industry, savings would equal $54M which would equate to a net earnings improvement of $54M or greater than 100%.

Certainly there are timing issues involved in the above scenario that will determine when savings reach the P&L such as when the contract is signed, delivery begins and sell through of the contract occurs. That would certainly happen within twelve months of contract signature. This author does not believe this is an intricate or difficult problem and as such suffers great consternation that in this economy C- level executives do not accept the challenge to drive these types of improvements.

As always, we look forward to and appreciate your comments.