Economic survey

The recession may be over – but its effects continue to loom over procurement. However, professionals see some positive signs ahead

 

Summer 2010

By Rima Evans

 

Although most companies are still feeling the effects of the recession, some procurement departments are now beginning to focus on strategies for growth and recovery.

CPO Agenda’s latest half-yearly economic climate survey found that whereas the turnaround is still in its early stages, a minority of organisations are driving forward measures other than cost-cutting and benefitting from greater investment in procurement.

The survey of 61 CPOs in sectors including manufacturing, IT, government, oil and gas, and retail found that 16 per cent of respondents, their objectives, priorities or resources have changed this year as a result of the easing of the recession.

Asked how they have changed, a majority of these respondents – 58 per cent – reported they were focusing on strategic supplier relationships rather than simply cutting costs (see chart 1, below). 

Although most companies are still feeling the effects of the recession, some procurement departments are now beginning to focus on strategies for growth and recovery. CPO Agenda’s latest half-yearly economic climate survey found that whereas the turnaround is still in its early stages, a minority of organisations are driving forward measures other than cost-cutting and benefitting from greater investment in procurement.

The survey of 61 CPOs in sectors including manufacturing, IT, government, oil and gas, and retail found that 16 per cent of respondents, their objectives, priorities or resources have changed this year as a result of the easing of the recession. 

Asked how they have changed, a majority of these respondents – 58 per cent – reported they were focusing on strategic supplier relationships rather than simply cutting costs (see chart 1, below).

A third said they were driving the sustainability agenda forward. The procurement function is also beginning to benefit from investment again: 41 per cent said they were hiring new staff and a quarter were investing in areas such as technology, while restrictions on discretionary spend areas such as travel and training were being lifted.

One respondent, Frank Omare, director, supply chain and operations at Ernst & Young’s advisory business, agrees that recovery is on procurement’s agenda now. “As we come out of the recession, organisations are now focused on top-line growth,” he says.  “The new agenda for procurement is collaboration with suppliers to develop new products, reduce the time-to-market or support anticipated growth from emerging markets.”

Larry Beard, interim procurement director at British Airports Authority (BAA), says he is now able to start looking forward rather than merely to the short term. “Purchasing is still required to cut costs – that is a given – but it is now in a position to be in strategic discussions,” he says. “We are now in a second phase and we have to do things differently.

“I like to think everyone has already gone for the low-hanging fruit and is now pursuing more strategic initiatives, so outsourcing is perhaps on the agenda again as well as other major projects. At BAA, capital projects are continuing and, compared with six months ago, we are engaging at a much deeper level in areas of the business.”

However, as Rob Woodstock, senior executive in the supply chain management practice at Accenture, says and as our survey findings illustrate, it is a cautious return to growth. “There is a very gentle swing from cost reduction to thinking about the upturn,” he says. “Many companies are still hunkering down.”

Others, he says, are beginning to think about growth, and returning to more strategic activities. “I have long been an advocate of closer strategic working with suppliers so it’s positive to see this on the agenda,” he says. Woodstock warns though that suppliers “never really trust supplier relationship management – they tend to see it as a price reduction exercise in disguise”.

Given that purchasing organisations have been openly seeking cuts in the recession, he says they now have to find ways of putting the relationship on a more sustainable basis. This means getting back to activities that benefit both sides and help to increase supplier revenues. “This may involve joint product development, looking at process improvement or increasing effectiveness, all areas of the interface between themselves and suppliers.”

Although Woodstock agrees there are signs of reinvestment in basics such as technology and staff, this may not only be the result of dynamic, forward-looking strategies. It could also be a consequence of the more aggressive cost-cutting pursued by some organisations.

“When difficult times hit, many companies were able to keep strategic deals and savings moving as well as find tactical savings. Others simply focused on tactical cost reduction – more of a ‘slash and burn’ approach,” he explains. “Both achieved their objectives in the short term but those that pursued the ‘slash and burn’ policy will find it difficult to sustain their performance and will now have to focus on what they can do to deliver sustainable savings. Those companies have no choice now but perhaps to reinvest in staff or look at SRM and so forth, to go forward.”

However, other findings echo previous CPO Agenda economic climate surveys, as procurement professionals say they are, in the main, continuing to feel the effects of the downturn. Sixty per cent say their functions’ objectives, priorities and resources have been affected by continued tightened economic conditions. An overwhelming majority – 91 per cent – say that pressure to reduce supply costs has actually intensified. This is slightly up on the previous survey in November 2009 (see chart 2, below), but down on a year ago.

More positive, however, is the news that fewer CPOs report that there is more emphasis on improving cash flow/working capital compared with six months ago (44 per cent compared with almost 60 per cent, respectively). In addition, there have been falls in the percentage of procurement teams that have had to make staff redundant and put a freeze on hiring new staff.

Still, Woodstock says some companies are yet to get over the recession. “Some are still not seeing any positive changes – they haven’t reached that point of the life cycle. Those firms that are subject to huge uncertainty and high volatility, such as mining or oil and gas firms, are the ones feeling the effects of the recession for the longest.”

Our survey points to another sector that is still on a rocky path. Of the 60 per cent of those who said they were still feeling the effects of the downturn, 11 per cent were  in public-sector organisations, mainly based in the UK.

This is hardly surprising given the recent change of government, a coalition whose central plank of policy is swingeing spending cuts in order to cut the country’s record budget deficit.

Delayed impact
One respondent from a public sector organisation said the fact they were still feeling the pinch was no surprise. “With all the emphasis on public spending cuts it should not surprise anyone. Also, public spending is mainly planned a year ahead, so impact is delayed as a result into this fiscal year and beyond.”

They add: “Why is public sector spending still under pressure? Public lending to banking bail-outs were not raised from new tax sources but from existing revenue, creating a deficit problem. During a recession, tax income may also reduce fall owing to reduced expenditure in the wider economy or increased welfare costs.” The respondent also reports “significantly more expressions of interest in tenders as well as more challenges on decisions”, which may intensify as cuts shrink the market.

Woodstock agrees there are ongoing cost pressures for the public sector, in particular, but adds that collaborative procurement, which hasn’t taken a firm hold in the sector, represents an opportunity: “Buying organisations that help government to collaborate have been underexplored. Over the coming years the public sector will have to make better use of them.” He says that procurement in public bodies was in good shape to meet the challenges ahead since it had escaped the same level of staff cuts as other departments and there had been investment in improving skills.

Meanwhile, the survey has also pointed to some key features of the buyer-supplier relationship. While purchasing organisations have been using the supply base to cut costs, they have also faced attempts by suppliers to improve profitability and cash flow.

The majority of respondents – 75 per cent – say they have renegotiated contracts or enforced pricing terms in an effort to reduce costs and improve cash flow in 2010 (see chart 3, below).

Meanwhile, 61 per cent had asked for price cuts and looked at cost-reduction projects with suppliers (although 63 per cent were also looking at internal cost-cutting measures by reducing their own demand).

Yet so far this year, compared with six months ago, more suppliers are seeking to raise prices. Whereas only 51 per cent reported this happening in November 2009, this time around 64 per cent of CPOs said vendors were testing the water for increases.

Woodstock says: “Many companies could only cut costs by getting price reductions from suppliers. In some instances, buyers have reduced margins to unsustainable levels, so suppliers are coming back and asking for price increases. Suppliers have borne the impact of the recession in many ways. Buyers and suppliers have to look at reducing costs to both parties.”

However, the survey also found that buyers have been willing to help suppliers through hard times in other ways. A third of CPOs say their organisation has provided direct financial support so far this year to suppliers (see chart 4, below).

“This is quite impressive,” Woodstock adds. “I was very heartened by that since it shows buyers are being responsible. It is enlightened self-interest.”

Fears easing
But the fact that buyers have been prepared to take action to help suppliers only partly explains why since 12 months ago there has been a general downward trend in the number of respondents who are worried that one or more key suppliers could fail. In the May 2009 survey, 75 per cent of respondents were either concerned or very concerned about this possibility. By November, this had fallen to 43 per cent and although it rose slightly in the current survey to 48 per cent, this is still a dramatic decrease from a year earlier (see chart 5, below).

Beard says that supplier failures have been far lower than expected. “At the back end of last year, I put together a survey of 100 purchasers and one of the questions was how many of their suppliers have ceased trading in the past few months. Ninety-nine per cent said it had been only 0-5 per cent. Peers seem to agree that this has been less of a problem than they thought it would be.”

The companies that did fall by the wayside, he adds, were sick already. “Most businesses that have been left have been robust enough to weather the storm.”

Woodstock agrees there has not been a huge amount of supply market failure. “This is down to a combination of suppliers themselves diversifying and being prepared, and buyers being willing to provide some financial support.”

The survey also points to another explanation for this: organisations have more robust processes in place to evaluate suppliers at risk. Six months ago, 43 per cent of respondents rated their supplier monitoring systems as good or very good, rising to 47 per cent in the current survey. In addition, only 7 per cent of respondents rated their systems as poor or very poor, compared with 20 per cent six months ago.

The methods that procurement departments are using most often to evaluate suppliers at risk of failure are monitoring their supplier’s business performance and financials more closely (81 per cent) and using market intelligence such as news feeds (77 per cent) (see chart 6, below).
Woodstock says: “In our experience, companies are doing a very good job of not only monitoring the health of the supplier base but also understanding which suppliers are most critical. However, every company should monitor supply risk – it’s another sign that you are running a good procurement department.”

Lastly, has procurement been stepping up to the challenges it faced during the downturn and now in its aftermath? Almost all respondents – 94 per cent – think the department coped either well or very well, and 91 per cent said they were confident or very confident that the function was now in a better position to contribute value in areas such as SRM, sustainability and innovation.
One public-sector respondent who thinks procurement raised its game says it has increased the credibility of the function: “There is more internal awareness of the benefits of good evaluation models such as quality/price and applying whole life costing.

“Quarterly expenditure and collaborative sharing of information gives more clarity in capturing efficiencies from procurement actions. Although we have done this for several years, the recession has meant senior people now care about the answers we provide to demonstrate the added value that procurement professionalism brings.” As a result, the respondent adds, introducing new streamlined processes such as e-procurement or e-tenders was now met with little resistance.

BAA’s Beard agrees that procurement’s credibility and positioning has improved because it has delivered during the tough times. Although he warns: “The issue will now be how that is translated and taken forward. Some people are not going to be comfortable with participating in a more strategic discussion, which we have the opportunity to do.”

But he adds that procurement fared well at BAA. “We are now getting better engagement – success breeds success.” One of the procurement success stories
he describes is reducing 50 suppliers of support services and facilities management to four. The work started last November and being completed now delivered “substantial cost reductions” as well as “improved services”.

However, one CPO who says procurement did not cope that well during the downturn pointed out that there have been parts of the world less affected by the recession. The respondent said: “Of course it was a trigger for us to refocus. But this is all to do with maturity level. In hindsight, the recession was another incident. Growing in your maturity is based on sound strategic tactics and not led by incidents.” 

What the CPOs are saying

"We have a proactive approach to cost and driving procurement-led change across our business that transcends this recession, so we have been well equipped to handle any issues. In fact, the recession has not created any additional abnormal pressures in procurement that did not exist before as a matter of our normal operating model."
Group procurement director, retail and pharmaceuticals

"There is no doubt things have been extremely difficult but it is a time
for steady nerves. We have tried to use the downturn to improve our capabilities so that when the upturn comes we are in a position to hit the ground running."
Director of operations, manufacturing

"There has been little government-led challenge to reduce costs.
Our organisation, like many other public sector bodies, can readily cut costs without seriously affecting outputs, but has had no central challenge to do so and as such continues to spend in an unnecessary fashion."
Head of procurement, UK public sector

 

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Rima Evans (rima.evans@redactive.co.uk) is projects editor for CPO Agenda