The last few months have been extraordinarily tough for businesses. Even for companies that have performed well, there has been the challenge of operating during unprecedented global restrictions and managing demand that was completely unexpected six months ago. For other businesses, the crisis has been existential and put them in a battle for survival.
Whichever end of the spectrum your business is at, as the economy starts moving back towards a ‘new normal,’ there will be a lot of big choices ahead. Many companies will emerge from this downturn looking very different from how they entered it.
Discussions are happening daily among C-Suite members of global businesses about the strategic direction their companies will take. Yet to a large extent, the success of those decisions is contingent upon the action of third-party suppliers.
For many businesses, supplier costs make up as much as 70% of turnover. But what if I told you that your business could most likely reduce its supplier costs by between 8% and 15%? Would that change some of the decisions that you and the CEO are making right now? Would it save jobs? Would it allow you to invest in new areas?
Our decades of experience working with some of the biggest companies in the UK and the US suggests that’s exactly the amount you could be reducing your supplier spend by – saving your business millions and giving you and your CEO much-needed headroom.
The reason most companies aren’t realizing this saving is simple – lack of specialist expertise. You’ll have a procurement function and they’ll more than likely be doing a good job. However, their role is to service the needs of the business, and it’s very unlikely you’ll have someone who is an expert on every area that you spend money, particularly in such an evolving marketplace.
In practice, this means you’re often relying on processes (the classic method being RFPs) and a limited number of benchmarks to make your spend decisions, meaning you’re not getting the savings that you could be. When you blow this up to a company-wide level, you are talking about tens of millions (and for some large companies, hundreds of millions).
You might be one of the lucky CFOs who is in a business that forecasts a high growth track over the next few years as the world emerges from the pandemic and thinks, “Do I really need to do this?” My answer would be “Why would you not?”. Even if higher than necessary supplier spend doesn’t inhibit your immediate growth, there will come a time that you’ll find that a lack of action inhibits your business and acts as a barrier to choices that would have otherwise been available.
So whatever situation you find yourself – make it your priority as CFO to start delivering that 8% to 15% reduction in supplier spend.
If this resonates with you, then you should be comforted and compelled by the fact that many of your peers will have already started down this route, using procurement as a tool to pinpoint and unlock immediate value, and enable long term operational and financial health.