When I’m not working diligently sourcing stories, interviews and ideas for this site, CPO Rising, I wear an industry analyst hat (but I am still laser-focused on supply management) and do a fair amount of media work. Well anyway, yesterday I had a sit down with some media types to share some thoughts and perspectives on where we are in the current business cycle and what portends for 2012. Here is an approximate transcript of the first part of the discussion.
Q. What do you think of companies that continue to rely on cutting costs to help support net income? Is the trend sustainable?
AB – The trend is absolutely sustainable; more than that, it has become a requirement. First let’s look at the numbers. For companies operating with low margins, the impact of cutting costs on net income can be extraordinary [Sidebar: reference the article, A Penny Saved is a Nickel, Dime or Quarter Earned for a detailed discussion about this].
If you were to go back and read through the earnings call transcripts for Q4 2008 and Q1 2009, you would see a surprising number (surprising then, not now) of CEOs talking about the importance of cost-cutting to their strategy over the next 12 months. Time and again, CEOs pivoted away from the difficult sales environment and focused on what one CEO referred to as “controlling the controllables (sic)”
While this trend started in 2009, it has continued into 2011 and I expect it will continue into 2012 and beyond. From my standpoint, placing even a part of the overall company’s success in the context of procurement-led initiatives makes great business sense. Why wouldn’t you want an effective procurement operation defending margins, protecting against risk, assuring supply? But, beyond just making great business sense, driving value through the procurement function has become an absolute requirement. Companies that miss this opportunity will fall behind in the market.
Think about this, the global consumer has been trained to expect a steady stream of new and improved products every year and at a lower cost. This is Moore’s Law (which said that chip computing power would double every 18 months) being applied to everything. Innovation is the main driver of consumption in certain industries – Apple is the clearest example of that – iPhone 5? / iPad 3? – people can’t wait.
Lower product cost? Procurement can do that
More R&D? Procurement can support that by saving more on the indirect side
Innovation – find the most innovative suppliers? Procurement can do that too.
Q. Will procurement become an afterthought when sales pick up in the future or will this time be different?
AB – There is always a risk that companies will forget about the things that helped them succeed in unusual or tough times. “Ohh,” some may ponder, “2008-2009? That was a one-off situation, we can go back to business as usual.” Of course, this is a possibility for some companies. And, considering the trend of lower employee tenure averages and more executives in perpetual transition, it is possible that the new executive team in charge wasn’t around when procurement saved the day and thus, continues to work with the old mindset of what the procurement purchasing function is all about.
In many cases, there is absolutely no risk of this happening – particularly at many of the top-performing organizations that I connected with during the rough spots – most of the leading Chief Procurement Officers didn’t feel there was anything particularly unique to the circumstances – they had their “eye on the ball” in good times, they were prepared for the bad. When the good times start to roll again, they’ll be ready still.
Now, it is very true that a good number of sourcing and procurement leaders faced phenomenal or higher pressure to cut costs, to negotiate better contracts, to find and save money in a big and fast way. For this second group of leaders who were working in a new context, the many who delivered are and were champions. They should be celebrated. But, even if they were never given their due, I have to believe that these groups also face little risk of marginalization during the next upswing. The value and the opportunity from what was delivered is simply too great to ignore.
Also, when did companies lose their ability to multi-task. Just because my wife tells me I’m not good at it (for those scoring at home, she’s wrong), that doesn’t mean that companies can’t be (good at it). In fact, being able to successfully multi-task is the defining characteristic of many Best-in-Class companies –
You can design a great product (engineering), but can you make it (manufacturing)? Distribute it (supply chain)? Can you sell it (sales and marketing)? How do you finance it (finance)? Ensure that the best people are in place (HR), connected (IT), and focused on the right vision and markets (executives)?
Postscript I: One of the great things about procurement and supply management is how I can rewrite those last two lines, add in procurement and have it ring true. here’s what I mean:
You can design a great product (engineering) profitably (procurement), but can you make it (manufacturing with procurement assuring the right supply at the right place and time)? Distribute it (supply chain leveraging highest-value third-party services who signed contracts negotiated by procurement)? Can you sell it (sales and marketing) in existing markets and in new markets where the best competitive intelligence comes from the strategic suppliers managed by procurement? How do you finance it (finance who has more cash on hand from the numerous levers procurement can pull)? Ensure that the best people are in place (HR, who with help from procurement, also manages different aspects of temp labor, outsourced resources, and consultants), connected (IT with innovative low-cost gear identified by pocurement), and focused on the right vision and markets (executives, who now, more than ever look to procurement for guidance)?
OK maybe the executive part in blue font is a stretch, but the red font holds true.