Today?s rant is from Ronald D.? Southard, CEO at SafeSourcing
I?ve been reading a lot lately about the fact that overall cost reduction is dead and that maintaining cost or cost containment is where companies should be focused. The logic behind this conclusion is that many of the indictors of the potential for savings such as inflation, crop availability and demand that drives current pricing models will never be what they were in recent history. While I review this data on a daily basis and the premise for the argument has merit, over all I don?t buy it and if I did I would not be as passionate about what it is that we do for a living at SafeSourcing.
The reason I disagree, is that so many companies do not or have not used the type of advanced eProcurement tools that are available to them today in order to compress current pricing. While many best in class procurement practitioners that use the most current generation of eProcurement tools may have squeezed or compressed pricing within their supply chain, the fact is that many have not. Additionally, many of these companies have not renegotiated their contracts for years in order to take advantage of the prices that may have been available to them. Although there supplier may claim to have shrinking margins, the question that needs to be asked of the supplier is what is my margin to you compared to other customers that you service. Another issue that flies in the face of this opinion is that there are suppliers out there that may want a company?s business and as such are willing to take at a lower margin with the hope of growing their wallet share with this customer over time. The fact is if you don?t ask or have never asked, you will never know.
I have always believed that it is possible to improve earnings dramatically though the use of modern eProcurement tools that continue to regress in price as a result of advanced technologies. In the retail segment I have posted examples that show how companies can improve earnings by greater than 50% by just focusing on 20% of their total cost of goods. This process will improve gross margins and net earnings. The issue that is not generally discussed is how to prove this.
The simple fact is that the P&L from a company?s prior year never quite looks like the P&L from the current year, as companies continue to evolve their programs for customer acquisition and growth. Examples could be new marketing programs, branding initiatives, new formats, new product strategies and mix as well as a host of other initiatives. Unfortunately, these programs are not always tightly linked throughout an organization so that what a procurement department is focused on directly reflects itself in a side by side P&L comparison year over year. An example of this might be special board driven capital programs for millions of dollars that negatively impacts earnings, when the procurement department can demonstrate in a very real way that they took millions of dollars out of the cost of goods resulting in direct cost reductions. If the capital program which was board approved is 3 times the size of the savings generated by cost reduction, guess what earnings will look like if revenue did not grow dramatically. The answer is negative earnings. The fact is that the procurement department may have exceeded their plan for the year and in fact been paid their annual bonus. But, because the entire organizations goals and alignment are not tightly linked the savings get lost in the data. Unfortunately this is not an uncommon issue.
I have not even discussed the expense area in this post.
If you?d like to learn how to address this issue within your organization, please contact a SafeSourcing customer?s services representative.
We look forward to and appreciate your comments.
