4 February 2010 | Nick Martindale
With the first signs of an upturn beginning to show, buyers need to be on their toes. So what can they do to prepare? Nick Martindale reports
At the start of 2009 virtually everyone working in procurement knew they faced a tough year. Reducing costs and ensuring security of supply were the most pressing issues. A year later the UK economy is starting a slow recovery, according to latest figures from the Office of National Statistics, which showed 0.1 per cent growth in the last three months of 2009. This will bring with it challenges and opportunities for buyers and senior procurement professionals, many of whom will have relished a return to a buyer’s market over the past two years. Preparation will be essential to ensure organisations are in a position to take advantage of the recovery and avoid some of the pitfalls that could be ahead.
A PEEK AT THE FUTURE
One of the main concerns will be a swing in the balance of power back towards suppliers, who may attempt to reverse some of the price cuts they have been forced to accept during the downturn. “The position put forward to procurement by suppliers will be that prices need to rise because an upturn is round the corner,” says Rob Woodstock, management consulting senior executive at Accenture. “Buyers need to maintain a fact-based position. Interest rates haven’t risen and the growth projections for GDP and for most corporates are quite modest.”
Colin Davis, director of supply chain at United Utilities, believes his sector is likely to remain in downturn for a further six months. He plans to use that time to secure long-term contracts with suppliers. “Traditionally we might have stuck with arrangements for one or two years but we’re now looking at putting arrangements in place for five or 10 years while we’re in the trough,” he says.
“We anticipate some of our suppliers asking to raise prices, but equally, as the markets trend upwards, we may have a pricing impact in the market so that will flow down through the supply chain,” says John Dickson, head of global procurement at drinks manufacturer Diageo. “It’s not about keeping a supplier down; if we continue to push back price increase requests which may be appropriate the supplier will go to the wall.
“Whether you’re in an economic downturn or an upturn, the principles of economic management around the sourcing activity are the same. You still have to be conscious of your suppliers’ margins and of the impact on the quality of the product if they start cutting corners.” His strategy has been to tie suppliers into longer-term contracts with flexibility on price and volume built into them.
There is also a danger that once prices stop falling internal resources will be shifted away from procurement, says Adeeb Dhallai, partner and head of the procurement advisory team at KPMG. This could deprive the organisation of its ability to minimise price inflation. Those in senior roles will have to fight against this threat, he says.
Hand in hand with the fear of price inflation is the possibility in some sectors of supply shortages. This is the biggest worry for 2010 for Nigel Coghlan, global procurement development manager at Itron, which makes electricity, gas and water meters. “We’re starting to see the lead time for a lot of components increasing quite dramatically, which could have a big effect on the introduction of new products,” he says. “We’ll need to work closely with suppliers. But we’re certainly placing orders and forecasting suppliers further out than we normally would.”
Securing capacity is also an issue for Michael Mikkelsen, group purchasing director at roof window and blind provider Velux. Currently the concern is to maintain capacity as suppliers scale back, but he anticipates it being an issue when demand picks up too.
“We’ll need to focus on the time period for ensuring that extra supply when the market comes back,” he says. “The cost could be using an extra supplier with a higher price and a lead time of two months or much worse, or it could be the consideration of production tool investments. Are we willing to do that? And are we willing to slowly increase inventory, as much as capacity allows us, because right now we have reduced our inventory dramatically?”
BUILDING BRIDGES
An economic recovery will certainly mean organisations have to focus once again on supplier relationship management (SRM) and innovation. In some cases that will mean rebuilding relationships that have been damaged by the tough stance procurement took during the downturn.
“That is probably the key challenge,” says Dickson at Diageo. “A number of suppliers feel that procurement has been quite hard-nosed in its approach over the past 12 months. You have to understand the supplier and their cost make-up and negotiate around that. But we have to be very selective in terms of who we see as the top tier of suppliers and make sure that we rebuild those relationships and that we’re not giving the perception that we’re only trying to do that now the market is picking up again. We have to balance that with a longer-term message around potentially contracting further out.”
For Velux’s Mikkelsen, meanwhile, this has extended to changing the way in which the business liaises with suppliers. “Traditionally we have been a very closed company and didn’t want to use external companies as much as we are willing to now,” he says. “We have extended quality procedures and given responsibility to suppliers for the testing and approval of products where they were not involved previously. We’re trying to get an even wider grip on all the costs in the supply chain.”
At KPMG, Dhallai has also noticed a greater willingness to engage more collaboratively with suppliers. “It’s really hard to sell anything strategic in a recession but organisations are now inviting us to the table to have strategic discussions more than they were six or eight months ago,” he says.
“There’s also more of a willingness to work with the supplier base to drive innovation around products and services. I’ve seen some big corporates combine the innovation and SRM angles to engage the supply base in a much more strategic way.”
INWARD INVESTMENT
An economic upturn also raises internal issues for supply management functions and procurement departments. Top of the list is likely to be the need to ensure sufficient resources to meet the demands of a more buoyant economy, after the drastic reductions in headcount in 2008 and 2009.
“Although many companies are shedding staff – and we’re under the same sort of pressure – there is a real opportunity to attract the best talent,” says Davis at United Utilities. “People are attracted by companies that break some of the rules around budgeting and recruit in a downturn so you can attract talent that perhaps wouldn’t naturally hit a utility company.”
Accenture’s Woodstock agrees a downturn is a good time for organisations to pick up very capable individuals. Those with experience in SRM and working with suppliers on innovation initiatives are likely to be most in demand. “Now is the time to find those people and bring them in,” he says. “But there also needs to be an element of watching your own talent to make sure the best people in your organisation aren’t poached.”
Diageo’s Dickson, meanwhile, says he expects procurement to be in a strong position to argue for an increase in headcount when the economy improves, on account of the value the function has delivered over the past year. “It’s still a bit early but the perception of procurement in this organisation has never been higher and we’re in a position where we can make a case for a longer-term strategy for procurement, which will make the function a lot more agile,” he says.
“The key question, though, is where you put them. The temptation is to recruit in North America and Europe but if you think about where the growth is, it’s actually our developing regions of Latin America, Africa and Asia Pacific.”
Others, though, are looking to refine their existing processes to increase efficiency and avoid the need for large-scale recruitment. Power management company Eaton has developed the “One Eaton” initiative which aims, among other things, to share resources more effectively across the business without the need to drastically increase headcount.
“We are becoming a much more integrated business and are looking at how we can do things better with fewer resources, becoming smarter in terms of structure and organisational processes,” says Les Ball, vice-president, supply chain management, EMEA. “We’ve reorganised ourselves to such an extent that we’ve got a sustainable organisation that can support future growth, even with a lower level of resources than we had in 2007 or 2008.”
For many companies, now is also a good time to consider the wider set-up of the sourcing and procurement function. Davis at United Utilities, for example, is considering shifting the sourcing focus from low-cost countries back to the UK as a result of the fluctuations in exchange rates, although he admits there are still opportunities in the traditional low-cost markets. “It’s a bit of a dilemma,” he says.
Other companies are wrestling with the idea of offshoring more elements of supply management to shared service centres in low-cost countries, says KPMG’s Dhallai. “We’re seeing companies making shared service centres take on responsibility for low-value procurement and looking at supply market research dynamics,” he says.
“Rather than a national focus we’ll start to see more of a pan-European focus and organisations need to consider that alongside make-or-buy decisions.” Setting up procurement organisations that can procure global categories from tax-efficient countries such as Luxembourg, Sweden and Switzerland is also attractive, he says. This can deliver a return on investment within two years.
Woodstock at Accenture, meanwhile, suggests some organisations see now as a good time to look again at initiatives that may have been shelved when the focus was on cost reductions. “We’re now seeing a wave of investment in infrastructure, so some of the technology projects that were put to one side are now resurfacing,” he says. “There is an understanding that you can only maintain your pricing conditions and get a decent level of compliance without systems for a certain period of time before those benefits start to erode.”
The emergence of an upturn also raises the issue of how procurement teams can capitalise on the gains they have made during the downturn in the perception of the function in the wider business.
TAKING ADVANTAGE
“There are a number of us who took on roles that are broader than purely procurement and supply chain as a result of the downturn,” says Davis at United Utilities. “If people haven’t capitalised on that it’s unlikely they’re going to get that opportunity again. We must make sure we don’t lose that in an upturn.
“Procurement needs to move from being a hero for enabling rapid cost reductions to being a hero for positioning for innovation and growth,” Woodstock adds. “It needs to anticipate the need for supplier management in an upturn and take leadership for that. That’s the one thing I’d draw out: the role that procurement can play in innovation and growth and how they can proactively position that in their organisation.”
Not everyone is convinced procurement is in a position to take advantage of opportunities afforded by the slump.
David Henshall, founder of consultancy Purchasing Practice, says: “The opportunity now for the profession is to build on the platforms it has secured during the recession and try to break out of the cost trap.
“We need to look at where we are on the maturity curve and what we need to put in place within the organisation, such as deeper collaboration and innovation. But there’s a difficulty in creating those types of role if there isn’t a clear endgame in mind.
“The endgame is to almost become a procurement entrepreneur in the business because you’re ultimately market-making, looking at what’s going on in the external environment and within your own internal capabilities. We’re a long way from that.”
Nick Martindale is a freelance business writer
