Today’s post is by Ron Southard, CEO at SafeSourcing Inc.
I continue to think that most organizations and in fact most people don’t think big enough. This includes CEO’s, CFO’s and many of the other C level professionals. However this is not limited to just executive leadership, it happens at every level of every organization. And the most troubling fact is that it happens with almost all people. So it is no surprise that it happens in procurement as well.
I have posted on a number of occasions the impact that I personally believe a procurement organization can have on the overall operating results of companies. For the most part this function within retail companies reports to a CFO, CPO or CLO, so the purview is at the highest level where it needs to be.
The following is an excerpt from a post on March 25th of 2011 titled Improving profitability 73% and why more companies don’t use reverse auctions and other e-procurement tools?
Assumptions:
1. $150M Retail Company with industry average earnings of one percent or $1.5M.
2. Cost of Goods (COGS) for this company is industry average of 70 percent or $105M.
3. Company agrees to source ten percent of their Cost of GOODS or roughly $11M.
4. Company achieves below industry average savings of ten percent.
5. Total savings generated equals $1.1M
6. Savings drops directly to the bottom or net profit.
7. All other segments of the P&L perform to current fiscal plan
8. All savings are recovered during the same fiscal year.
9. Net profitability improves from $1.5M to $2.6M or a 73%.
Now let’s be realistic, all of the savings are not going to happen in the current fiscal year. With that said, we are only sourcing 10% of the total COGS. We achieved below industry average savings. No unforeseen costs that were not planned for eroded earnings. There will also be switching costs that may a erode some of the savings, but in today’s world they are not that significant.
If the above example is true, why are procurement departments not thinking big enough in order to chase this opportunity? If the company is publicly traded I would argue that there is not much else if anything that could drive similar operating results including acquisitions.
If you look back over many years, today’s bottom line of this industry is eerily similar. All the format changes, product mix changes, new technologies, specialization etc. have not materially improved the bottom line.
An argument from senior management might go like this! “We cannot maintain these savings year over year and our investors and other stakeholders are looking for sustainable results”. “As such, if we in fact deliver these results in the first year we will be penalized in subsequent years if we don’t deliver similar results”.
My rebuttal would be that in our example we only sourced 10% of the COGS. We did not touch expense. We did not put tools in place that would protect savings like a contract management solution. We did not strategize as to how to treat the categories being sourced so that we could take the category to market year after year in order to further compress or maintain cost.
This of course begs the question of how we might do just that. The first step is to think bigger, to believe that this is possible and then assign the resources to make it happen.
Maybe if JCPENNY had tried to execute this type of strategy their former CEO would still be there and all of his company stock would be worth a lot more than it is today.
Check back tomorrow and we’ll discuss how to think through a category strategically so that savings generated don’t erode over time regardless of the market conditions.
If you’d like to accomplish big results that stick, contact SafeSourcing.
We look forward to and appreciate your comments.
