Four years ago, our then MD Peter Smith wrote a blog about Procurement’s strategies and actions in times of trouble. Some readers have requested this be republished, it having slipped out of publication. So here it is again – published with kind permission – with musings from early 2016 that are just as relevant today in these difficult times:
The new year has started with very dramatic movements on the world’s stock markets. Concerns about an economic slowdown in China, and what looked like a “bubble” in share prices in that country, have driven the Shanghai market down by over 20% in 2016 already. Other markets followed, with concerns about debt levels, the inability of central banks to stimulate economies further given very low interest rates, and “experts” in leading bank RBS telling their clients to “sell everything.”
Mind you, as one of the organisations that caused the last great financial crisis, RBS hasn’t always got it right! The optimists will point to record levels of employment in the UK, healthy company profits, and a new age of technological innovation really getting into gear with drones, AI, enhanced reality, 3-D printing …
But when times get tough, there is always a danger that procurement reverts to the most basic of approaches. Under pressure from the CEO or the CFO, the function looks to cut costs and improve cash flow. Get out the big hammer, threaten to beat up the suppliers, demand price reductions, extend payment terms … the depressing list goes on. To some extent, this is easy stuff to implement, although of course it has longer term effects in terms of supplier relationships, risk and security of supply and so on. (“We want to be your strategic partner and you must give us all your best ideas for new products. Oh yes, and a 5% price reduction across the board please.”)
However, there is another type of approach. Whether times ahead are good or less good, it is the fundamental job of procurement to deliver competitive advantage to the organisation through the use of external markets. And that means finding the best suppliers, wherever they are, for the particular requirements. Perhaps those are the current suppliers; perhaps they are not.
So even if we are moving into difficult times, procurement should be actively searching out the best suppliers in all the key supply markets. That means keeping up with new developments, understanding new players in the market, as well as new products or services from existing firms. That is more challenging but ultimately a lot more rewarding than simply hammering the existing supply base for another 2% discount.
Luckily, taking this approach is a lot easier than it used to be in the pre-Internet days! The wealth of information available means there is no excuse for procurement professionals not to develop and maintain this level of knowledge. And there are tools that are helping further to connect relevant buyers and potential suppliers in a simple, secure and useful manner.
Of course there are times when it can be appropriate for procurement to revert to pure power-based negotiation, but if we really are a “profession,” we need to prove that by taking a more sophisticated approach, including the development of deep and current market and supplier understanding. Put the hammer away and start engaging the brain!
