New Year, Next Normal
New Year, Next Normal: Why Cost Reduction & Procurement Transformation should be at the top of the 2021 agenda.
As usual, January provides an impetus for commercial planning, either to start a new calendar year or in preparation for the new financial year. However, with 2020 assailed by COVID-19 and with the variability caused by an uncertain Brexit trading outcome, it will be far from “business as usual”.
Covid-19 has wreaked havoc on margins; impacts from inflation, supplier failures, logistics premiums, and reactive resourcing have all taken their toll on profitability. Right now, we are seeing both raw material pricing increasing and transportation costs jumping. A combination of Brexit uncertainty stockpiling, port operation problems and Chinese New Year, combined with a more positive economic outlook driven by vaccine positivity have doubled-down on cost inflation.
Procurement Cost Reduction recovers profitability and optimises the supply base
For most organisations, profit improvement will be top of the C-suite agenda. In simple terms there are two levers; increase revenue (and your profit improves by a factor of revenue multiplied by % profit margin) or decrease costs (and your profit improves directly by the value of the saving). However, to mitigate risks and forgo further economic shocks and ensure resilience and sustainability in 2021 and beyond, organisations will need to bring Procurement Transformation to the top of the agenda.
The second point is key here; procurement is not about indiscriminate cost cutting, quality reduction or service impact. Excellent procurement will put in place the optimum supply and commercial arrangements often finding the most innovative suppliers, improved service, improved quality and lower costs.
Whilst revenue growth is important, cost reduction provides the largest and fastest impact and one that can be quantified, planned and executed through a structured approach to procurement cost reduction. In the current economic climate, a 2021 cost reduction initiative should be on every strategic plan.
Top down versus bottom-up
Generally, organisations plan budgetary forecasts in two ways; top-down or bottom-up.
In top-down, a target is set and imposed on the organisation. The results can be disappointing; lack of buy-in, zero sum activity with departments working against each other and missed targets.
The alternative, bottom-up planning, involves working out what is possible with functions, gaining buy-in to realistic objectives, discussing delivery routes and developing corporate teamworking.
It takes longer but the result is better.
For a procurement cost reduction initiative, bottom-up planning rather than top-down, is the difference between success - when procurement engages the business, and failure - when procurement operates in an isolated silo with little influence on the organisation.
Assessing the opportunity
An Opportunity Assessment helps you to identify, evaluate and quantify the potential for organisation-wide savings in bought-in goods and services expenditure.
This is an essential tool for optimising the effectiveness of any cost improvement programme, providing the in-depth insights required to prioritise opportunities for procurement savings as well as a plan for their delivery.
Our team of procurement specialists will categorise, analyse and benchmark all your bought-in goods and services spend data in order to accurately identify and prioritise opportunities for savings. We will also interview your procurement staff to assess current performance and highlight areas for improvement.
With this information, we’ll develop a business case, savings delivery plan and long-term procurement roadmap. The process is fast, is independent and will involve minimal business disruption. It will give you a clear picture of your procurement performance – and you’ll know exactly what savings can be made and the best way to deliver them.
Cost is controlled, profitability is increased, but make it sustainable
The impact of the COVID-19 pandemic is the single biggest challenge faced by procurement organisations in the 21st century and illustrates how interconnected, and often vulnerable, links in the supply chain are. All eyes are now on the procurement function to help the bottom line and achieve savings from bought-in spend to support business longevity.
However, simply achieving savings will not be enough in the long-term. Priorities for procurement leaders are beginning to change from tactical ‘keeping the lights on’ sourcing to ensuring long term sustainability. As procurement functions have been forced to become much more flexible and responsive in wake of the pandemic, it has prompted executives globally to re-evaluate their entire supply chains from a much more strategic perspective.
Driving an improvement in procurement capability requires focus on the enablers of procurement excellence; understanding where you are now and building a roadmap to where you want to get to.
The Six Key Enablers of Procurement Excellence
- Strategy & Organisation
- People & Skills
- Strategic Procurement
- Strategic sourcing
- Supplier management
- Contract management
- Supply Chain
- Infrastructure, data & systems
- Policies, Procedures & Performance Management
Our procurement function diagnostic provides the starting point for understanding current capability and a model for achieving excellence.
By transforming its procurement capabilities and further enhancing the strategic nature of the function, organisations will be much better equipped for developing their competitive advantage. The challenge is in maintaining this strategic focus, not only in the wake of COVID-19 but for years to come.
See How Procura supports procurement transformation
Points to consider
- Procurement cost reduction and transformation should be top of the C-suite agenda in 2021
- Procurement cost reduction provides a strategic lever to decrease costs without affecting staff or quality
- Bottom-up cost reduction planning rather than top-down budget cuts is most effective
- Procura’s Opportunity Assessment helps you to identify, evaluate and quantify the potential for organisation-wide savings in bought-in goods and services expenditure
- Procurement Transformation will be vital to ensuring long term sustainability
Procura can rapidly identify precisely where to focus and then offer a range of services from targeted project support to complete transformation programmes. If you would like further information on how we can support your organisation, you can book an introduction with one of our procurement experts, here:
Email us: firstname.lastname@example.org
Call us: +44 (0)203 693 7275