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I must admit, the post by my comrade-in-arms Ed Bockman last week made me downright angry. Ed reports that the rising energy costs, inflation, and tightening supply markets of 2008 have made many spend management groups gun shy about strategic sourcing.
Buyers “simply don’t want to buy into the hype of pressure to “act now before it’s too late,” having been burned by that behavior in the very recent past,” writes Ed. This is certainly not last year’s supply market.
You’d have to have been Rip van Winkle not to wake up to the reality that a confluence of global events — from the credit crisis to a precipitous drop in global demand — has resulted in excess capacity across nearly every spend categories — from aluminum to contingent labor to zinc. And that this has created the greatest market environment for strategic sourcing in decades.
Buyers that are sitting on the sidelines afraid to re-source existing supplier agreements are doing a disservice to their companies. Worse yet, they could be putting their companies at risk of not surviving the downturn.
With customer demand waning, the best way to free up cash is to lower your supply chain costs. And my recent visits with the seemingly few spend management leaders brave enough to kick their strategic sourcing initiatives into overdrive, shows there is ample cost savings available in the supply chain.
In fact, these execs are downright bullish on the opportunity for them to improve the cash and EPS positions of their companies by capitalizing on current supply market dynamics:
- “We’re sourcing as much as we can to lock in better prices and secure supply for 2009 and beyond,” one supply chain executive at one of the leading food service companies told me earlier this week, “We’re looking at all commodities — from flour to uniforms where the markets underlying cost inputs like wheat and cotton [respectively] have dropped dramatically.” (And this from the same exec who was ranting this Spring about how rising global food demand and a ramp up in ethanol production were boosting crop prices.)
- The VP of Sourcing from a major packaging company just last Thursday told me “we’re going back and reviewing every sourcing project that’s been completed to determine if there is additional opportunity for savings.”
- Probably the most poignant comment came from the CPO of a regional financial institution whose team has stepped up strategic sourcing for everything from IT purchases to legal services: “It’s at this time and in this crisis that my procurement team can shine. We have the opportunity to help our company survive this crisis and thrive in the inevitable recovery.”
At the risk of sounding like Animal House’s Bluto (“Over? Did you say “over”? Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor?”), when the going gets tough, the tough get sourcing. Who’s with me?
8 responses so far ↓
1 Ed Hartman // Dec 9, 2008 at 5:41 pm
The Germans did not bomb Pearl Harbor.
2 Tim Minahan // Dec 9, 2008 at 7:59 pm
Ed:
That’s the joke from Animal House. I hope you got that. In fact, the very next line in the movie is, “The Germans?” Followed by, “Forget it, he’s on a roll.” That’s the risk of using pop culture references.
3 Wayne Munn // Dec 9, 2008 at 9:05 pm
Tim, I am seeing some “deer in the headlights” at the moment. . .meaning some folks are somewhat frozen by fear. Some also want to weigh their reactions to make sure they don’t do more damage to trading partners. However, I think this is changing moment to moment as our survival instinct kicks in.
From my perspective we need to talk in terms of tactical, as opposed to strategic, moves to take advantage of immediate opportunities. Maybe thinking in those two complimentary terms will make leaders more comfortable that they are not abandoning their strategic plans, but fortifying them based on a rapidly changing business climate.
BTW, that doesn’t mean that tactical changes won’t impact the strategic plan long term after the dust has settled.
Keep up the good work!
4 Tim Minahan // Dec 9, 2008 at 11:37 pm
Wayne:
Excellent and timely point. I agree with you. The antidote to the “deer in the headlights” syndrome will require spend managers to have some successful tactical strikes to validate the market opportunity and regain their confidence.
Tomorrow’s post will address some practical cost savings tactics that H&R Block is using to drive some quick hit savings — ranging from better specification management to changes in how their employees are consuming the products they’ve already bought.
Not all the spend management opportunity is tied up in strategic sourcing. But it the unique sourcing environment should not be ignored either. Chances like this won’t come along again anytime soon.
5 Supply Excellence — Cost Savings: It’s All in Your Approach // Dec 10, 2008 at 10:09 am
[...] & Recent Posts BT’s Procurement VP: Share ownership & success with stakeholdersSourcing Today: The Few, The Proud, The SurvivorsBuyer’s Market Opportunity: TransportationLeading Indices Show “Buyer’s Market” [...]
6 Tim Minahan // Dec 11, 2008 at 11:33 pm
My above post rubbed one SE reader so wrong that he pinged my personal e-mail with the following note:
Tim, don’t be angry. There is another opportunity here - to establish yourself as a customer of choice, a company with a strategic and ethical vision. Perhaps negotiation can and should occur, but it really should switch to a cost of ownership discussion.
Sure, kick suppliers while they are down - and watch your customers do the same to your company. Put your current supply base out of business - and then see how loyal or competent your new low cost supplier turns out to be.
I understand short term survival - but tomorow will dawn and may look very different from today …
I thought strategy was supposed to reflect a vision? What is the vision here, one of an endless war of attrition?
7 Tim Minahan // Dec 11, 2008 at 11:36 pm
I’ll now share my reply that I sent to this reader:
Not angry at all. Just misunderstood. I am by no means professing that companies should pull an Ignacio Lopez (of GM and VW infamy) and tear up their existing contracts with suppliers.
On the contrary, I am actively advising companies to keep suppliers in business by avoiding the easy temptation to delay payments to suppliers and, instead, make more informed payment decisions, including paying early. (Consider the article I co-authored with my colleague Drew Hoffler in the latest edition of IACCM’s Contracting Excellence, “Wise working capital management: Cash may be king. Just don’t kill your subjects.” http://www.iaccm.com/contractingexcellence.php?storyid=764) This is a very good way — probably the best in this economy — to become the customer of choice.
I am, however, concerned that too many companies are just freezing their sourcing programs — waiting for the economy to get better…or worse. I am recommending that companies take a hard look at accelerating and re-examining agreements that are coming to term soon, undoing the fuel surcharges that should now be passe, and replace some of their hedging approaches with more standard agreements that lock-in today’s favorable pricing for a longer term. And the sourcing opportunities in today’s marketplace are not limited to price concessions. These dialogues also open opportunities to develop creative, performance-based and risk-sharing contracting arrangements that remove waste and cost from the supply chain and reward each party with value based upon the risk they are willing to assume.
A smaller and weaker supply chain with fewer surviving suppliers is not good for anyone.
8 Supply Excellence — Above the Noise: The Truth About e-Sourcing // Mar 31, 2009 at 12:02 am
[...] in decades have been met with mixed response. While a number of sourcing managers are boasting how the current market has reenergized their sourcing automation (e-sourcing) programs, an equal number of dissenters — including uber-negotiator IACCM President Tim Cummins [...]
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