As the United States teeters on the brink of recession, perhaps pulling the rest of the world along with it, a panel of financial and procurement experts has recommended five ways that procurement professionals can prepare their companies for an economic downturn. The panelists made their case for action at a forum sponsored by the software vendor Emptoris.
"There are too many examples of companies that have tried the 'quick and dirty' approach to cost reduction, only to find that their wins were not sustainable over time," said Robert A. Rudzki of management consultants Greybeard Advisors LLC. "Top management needs to think strategically and work collectively to ensure meaningful, effective action."
Donavon Favre, a professor of supply chain strategies at North Carolina State University, said that when the last economic downturn occurred in the early 2000s, many companies rushed to reduce costs and in the process made cuts that ended up costing them more money in the long run. The lesson: Think long-term before you act.
Here are the panel's five recommendations on actions companies should take now in anticipation of rocky economic times ahead:
Strategy 1: Get quick visibility into spending. A company can't control what it can't see. "Companies have long been shackled by the dispersed and disparate nature of their spend data. It's stuck in dozens of different systems and departments around the globe," said the third panelist, Kirit Pandit, author of Spend Analysis: The Window into Strategic Sourcing. Fortunately, with the advent of software tools and outsourced processes, gaining global, enterprise visibility into spending is easier than in the past, he said. Spend-analysis software can aggregate data from dozens of different systems, including the major enterprise resource planning (ERP) platforms, and can analyze spending by commodity, cost center, geography, time, payment terms, and more.
Strategy 2: Take steps to mitigate inflation. The panel recommended renegotiating contracts with top suppliers to help insulate against inflation. In sourcing and contract renegotiation, the focus should be on highvalue, high-risk areas such as transportation and fuel. In addition, companies should focus on categories where they can negotiate lower prices with suppliers without incurring higher costs elsewhere or damaging their long-term interests relative to delivery, performance, and availability.
Strategy 3: Renegotiate and enforce contract compliance. Whether it's enforcing negotiated pricing, realizing quantity discounts, or ensuring quality standards and associated penalties and discounts, contract compliance becomes even more essential in a recessionary environment. Technology can play a role in helping to track and measure commitments compared to a supplier's actual performance.
Strategy 4: Mitigate risks when pursuing cost reductions. A bad sourcing decision or supplier issue can be devastating in a bad economy. One of the biggest mistakes companies make when negotiating with suppliers is looking strictly for lower costs, rather than evaluating overall value. The focus on lower costs that has led to outsourcing and low-cost country sourcing has brought with it sometimes unforeseen problems, such as poor quality, delivery issues, increased risks, and service interruptions.
Strategy 5: Do more with less. Budgets may be trimmed and headcount reduced in a recession, yet sourcing and supply chain professionals often are asked to do more to deal with global competitive pressures. The surest way to improve efficiency involves the smart application of technology, the panelists asserted. In their opinion, the best path is to choose proven, "best-of-breed" technologies that have been tested and have been successful at large, leading companies.