Cost savings have been procurement’s route to its present level of recognition, but is it the function’s future?
Cost savings have been procurement’s route to its present level of recognition, but are they the function’s future?
The old message, dating back many decades, is that businesses that focus on cost over value lose their competitiveness over time. But today, while that concept is more than familiar to any procurement executive, they still seem to have to speak the language of savings.
The theme of the World Procurement Congress 2015 (WPC), which takes place on 27-28th May, is ‘Mapping the future of global procurement’ and many of the discussions will centre around how teams can transform to become the high-performing functions of the future. But how those conversations and presentations deal with the problem of savings generation versus value generation will be an interesting barometer for progress.
It would be a bold CPO – and there are more than a few out there – who would stand up and say ‘my business does not care about savings’. In fact, year-on-year savings are among the first descriptive factors an executive will list about their function; certainly, then, that’s how business counterparts see them.
Yet, I’ve heard it said that what got procurement where it is won’t get it where it’s going. In the case of focusing on savings, it may even hold it back.
Of course, value and savings aren’t mutually exclusive, but they are problematic. For maturing functions, the tendency has been to focus on creating and demonstrating savings so that key metrics are around consistency, quality and price of supply. A sensible approach, but one that’s difficult to break out of once it’s woven into the fabric of the business.
So when CPOs from BASF, Fujitsu and Diageo take the stage for the panel debate about moving beyond savings (hosted by GEP), it will be telling to see to what extent they have kept savings and tried to include other value drivers in the conversation, or dropped savings as a defining metric.
Because there are problems with being measured on savings. First, they’re a diminishing return: there’s only so much cost you can reasonably squeeze out of a supply base each year without compromise. So, while the message to the board might begin as ‘we’ve completed all these value-add programs and €100m cost savings’, it’s potentially only the last part that gets listened to and when that isn’t part of the message, it sounds like the function is failing.
Another problem is the occasional conflict between savings and value-oriented activities. The cheapest option isn’t always the most secure, the most reliable, most appropriate. Take the example of industrial machinery: buyers know there’s a lower limit in terms of quality, but if they are tasked with creating cost savings, they may not be able to look at whether specification can be adjusted or whether more proactive suppliers that create a source of innovation are options. In that sense, a function that talks about savings is one that acts to create savings and is, therefore, one that has to sacrifice in order to make those savings.
A future without talking about savings seems unrealistic and, at least for less mature functions, savings provide a vital foothold and justification for their activities. But if there are leaders with the clarity of vision and conviction of message to get their counterparts to understand that what procurement doesn’t deliver in savings it can deliver in long-term measurable value, that may mean a radical change in how the function defines itself.
Where procurement is addicted to savings, perhaps it’s time to go cold turkey?
WPC delegates will be able to catch a panel of leading CPOs discussing ’Beyond savings – new frontiers for high performing procurement teams’, on May 27-28th.
You can follow all the action on the day on http://ift.tt/1vgDIJe and share your views on Twitter using #mapthefuture.
from Procurement Leaders Blog http://ift.tt/1FlvxAG
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