For many decades the position of purchase and supply managers has been overlooked. Yet, purchasing managers are much more than ordinary cost killers.
Nowadays the economic context makes the purchasing function even more strategic and it highly impacts companies’ performances.
In the past, companies used to find huge savings opportunities internally. After many years of focusing on increasing sales figures, it wasn’t very hard to identify useless costs. When the crisis hit us in 2008 – and lasted longer than anyone would have expected – most companies took their cost reduction plans a step further.
Meanwhile, as turnovers were decreasing, few options were left to remain profitable. But here comes the worst part: inevitably, some companies were stuck into a vicious circle. Because they had gone too far in their blind cost cutting policies, they had actually reached a point where they weakened their competitive edge, damaged their sales force and eventually destroyed their value proposition. In order to restore their value, they launched new cost reduction plans, over and over again, without any long-term strategic vision. Such behavior can lead to the decline of their business.
We at Bridgewater think that reducing costs is a leverage to implement and support a successful business transformation plan. But a leverage only, not an end in itself.
Anybody can reduce costs. There is nothing as simple as replacing a service provider by a cheaper competitor or cutting your expenses by not renewing your IT licenses. This is by definition what cost killers do. In the end, they do not only kill the costs, they also kill the business itself.
But when it comes to optimizing costs in order to create value for the business, it’s a whole different story. Who in your organization is able to design a tailor-made cost optimization policy that will eventually serve the company’s strategy?
According to a recent CEGOS survey, approximately 68% of the turnover of a company is dedicated to purchase. There is no doubt about the high strategic value of the purchasing function. Saving 1% on costs could often have the same impact as a 10% increase in turnover. Conclusion: purchasing should be seen as a profit center rather than a cost center.
Post-financial crisis emergency cost reductions plans are over. Back to value creation and to sustainable competitive advantage, something which – in the digital era – will lead many companies to adapt their business models and allocate as many resources as possible to this challenge.
A NEW MINDSET
We could strictly define the role of a purchasing manager as such: an individual in a company who has the responsibility of buying the items that are necessary to pursue the business needs. Through the years, we have noticed the following evolutions:
– Administrative function: buyers process orders;
– Negotiation function: buyers organize tenders, negotiate with suppliers and pick out the “best out of three”;
– Integration function: buyers do not only look at the price but also at the total ownership cost.
Taking into account the latest evolutions of their jobs, purchase managers are now ready to bring innovative solutions and prepare their company to face future challenges. They can build cost optimization plans with a precise view on the objectives, the strategy, the schedule and the risks.
Last but not least: now that you have killed the cost killer, it is time to adapt your wording accordingly. Make sure your communication translates the business strategy. Focus on the end – improving the value proposition – rather than the means – cost optimization. Authors have shown that the announcement of a cost reduction plan naturally creates demotivation among the staff. On the contrary, if you communicate on the value proposition, you will more easily engage your coworkers in a positive project.
Here are our recommendations:
1. Keep focusing on your core business and you will deliver more value for your organization. External experts can help having better and faster results on non-core business costs while you will remain 100% focused on your company’s strategy.
2. In addition to net savings, think about other critical aspects like delivering quality, increasing customer satisfaction, reducing the time-to-market, helping your business in offering the best product at the best rate.
3. Turn your communication in a positive way: your goal is not to reduce costs, but to increase the value.
Cost killing is dead. Think about how and with whom you can make the best decisions in order to create value for your company, your customers and your coworkers.