From SCDigest's On-Target e-Magazine

March 24, 2011

Supply Chain News: Is the Fact that Reducing Costs Seems always the Top Mission of Procurement a Bad Thing?

Cost Cutting Seems Tactical and Buyers want to be Strategic, one CPO says, but Notes Cost Cutting is Often Strategic; Do Annual Reduction Targets Lead to Sandbagging?

SCDigest Editorial Staff

We were intrigued with a recent piece in Europe's CPO Agenda magazine that asked chief procurement officers to consider this point: Year after year the number one priority for most buyers at all levels is “cost cutting," despite the fact that procurement is supposedly getting more and more strategic and important? Is this a bad thing?

The best and most thoughtful response came from Adrian Turner, head of European corporate procurement for Apple in London.

SCDigest Says: Watt says the focus on year-over-year cost saving lead "buyers to encourage higher initial prices with the necessary year-on-year reductions built in." What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

Part of the issue may be have to do "with the simplicity of the question," Turner said.

"If you ask business executives a simple straightforward question, such as what is the number one focus this year, we should not be surprised when we get a one-dimensional answer," such as cutting cost.

The heart of the angst over this, Turner said, is disappointment in the procurement profession "at having to admit cost cutting is the focus. The unspoken question is: is this all business really want us for? But does cost cutting really have such a negative connotation?" Turner asked.

Relatedly, he observed that cost cutting is seen as a "tactical" approach, or a lower state of contribution, whereas procurement is seen overall as becoming more strategic, leaving a dichotomy.

" I feel that we might be shying away from our professional heritage too quickly. I have been in many board meetings where cost cutting is firmly on the agenda and is clearly part of the strategic objectives of a company," Turner said, "So why this dichotomy between the importance of cost cutting and our angst at it being our professional purpose?"

He says that procurement professionals need to raise the level of the dialog and make cost cutting more directly tied to business results, and that saving money is a about a lot more than just negotiating lower prices.

"We do need to close the gap between business decisions that are rooted in cost cutting and purchasing performance," Turner said. "We need to engage in the lingua franca that sells the success of what we do and who we are. As a profession let's embrace cost cutting, but with all its facets - it is what we do best. It is our heritage."

Andrew Little, head of procurement at AGR Field Operations in Australia, also stressed there are many ways to look at cost cutting.

"Procurement is about cost improving, the basic concept being: “I used to pay $1 now I pay 90 cents – a saving.” However, also correct is: “I used to pay $1 and now I am paying $1.10, but it lasts a third longer, so again a saving," Little said.

(Sourcing and Procurement Article Continues Below)

Good procurement strategy will highlight savings, whether direct or indirect, he added.

Jonathan Watt, a former CPO and now executive consultant at State of Flux in the UK, said buyer compliance is an issue.
"Compliance in the supply chain is poor in most companies," he said, which is in part why many "savings" do not all reach the bottom line.

This "in turn leads to lack of trust and sandbagging of savings targets from buyer to CPO," Watt said.

Second, Watt says the focus on year-over-year cost saving lead "buyers to encourage higher initial prices with the necessary year-on-year reductions built in."

Interesting point.

Clive Dedman, head of procurement at Telereal Trillium in the UK, thought the cost-cutting focus was a problem.

"We are being judged on cost savings but classic procurement says that quality is the first consideration. Life cycle or “fit for purpose” has to be considered and it is important to make stakeholders understand that this is all part of the cost-cutting agenda," Dedman said. "I agree it is very hard to get this message understood – there is a deep lack of understanding" on this point among corporate executives, he added..

Do you think it is a problem for the procurement discipline that cost cutting is always the top priority? Which of the observations above resonate with you? Let us know your thoughts about the Feedback button below.