In the last few years, Technology has been moving so fast that it has become almost impossible to cope up with. Every day, there are dozens of new inventions or improvements that involve almost every aspect of our lives from healthcare to agriculture and from beauty to space invasion. However, not only technology has been moving that fast, as the frequency of economic crisis has been competing at almost similar speed.
The world does not seem to be able to catch its breath when it comes to those issues; in each cycle of 10 years there is almost a crisis, and this has been happening since forever (Wikipedia has a track for the crises that goes back to the first century). And every time the same cycle happens, we see the crisis coming but we close our eyes and act nonchalantly in hopes that if we do so the problem will go away; nevertheless, the crisis hits and we start panicking around taking drastic and uncalculated measures in hopes that we can weather the storm and go back to “business as usual” and “ this is how we have always done it.” What we always fail to do is to learn the lessons from each crisis and change how we do things so that come the next crisis we are better prepared.
Terms like optimization, efficiency, waste reduction, agility are unheard of when there is smooth sailing, but the minute we hit rock bottom as an organization we start scrambling around to implement them – albeit in a non-scientific way. And the most traditional approach is to take a linear comparison of costs vs. sales. So, for example if sales are down 10% costs should go down 10% regardless of the methods, tactics and/or reasoning. And the easiest way to do so is – yes you guessed it – is by what companies call “headcount optimization” which in fact just a sugar coating for mass layoffs.
But what if there was a more scientific approach to cost cutting? One which would have long term effects that go beyond surviving the crisis and that can potentially save the jobs of employees who were always loyal to their organizations? In fact, there is one and it lies in the helms of the procurement department of any company. Despite considering it as a cost center, a well-managed and well steered procurement department can actually be a revenue center and in fact can be the source of all efficiencies in any company. In times of crisis, when a company can’t push sales any further the focus becomes on increasing the margin – which is something that must be done even when sales are on the rise – however we will not discuss this point for the time being.
To increase the margins, companies most of the time turn to their fixed costs, they start thinking about green energy to cut electricity costs, online conferences as opposed to traveling, rent discounts from landlords and harsh policies regarding phones and stationaries, slashing some production lines and maybe selling some divisions. However, all the saving achieved are considered peanuts when compared to the biggest component which is employee compensation and that is where the senseless thoughtless slashing begins without taking into consideration the indirect costs of such decisions and their impact. Examples of such cost are – but not limited to- : existing employee burnout due to work overload from redistributed tasks which leads to mistakes which cost money, increased absenteeism, and most importantly a lack of job security among those who remain which again will affect productivity.
On the other hand, one can simply turn to procurement and work with them on how to become more efficient in the right way. Because although most of the costs come from the procurement department, it is not a cost department itself; instead it can be thought of it as the engine that moves the company and for the company to move smoothly and steadily in the right direction the engine should be well performing and in full throttle. The classical mistake is that companies start to remove the horsepower from this department \ to reduce “costs”. Everything goes under the knife, starting mostly with the headcount and not ending with the budget and we all know what happens to quality when everything becomes budgeted.
At times of crisis when sales can’t be pushed organically and instead of turning to inside the organization to keep profits, a company should keep its focus on the outside by working on keeping the existing customer base and making sure they come back for more or it has to stand out to attract whatever competition is left outside and this can’t be done with an understaffed organization or through buying discounted products. To differentiate or innovate you always need to get the best and procurement – and only procurement – can ensure that you can get the best, for the best price, with the right quantities and in the right time. Because procurement is not about “buying” things rather is it about ensuring a smooth operational flow. Yes anyone can buy things, but how to make sure that they are the best quality? At the best price? How does a company make sure that the supply chain is efficient and that it is not risking negatively affecting cash flow with overstocks in the warehouse or that production lines or services won’t stop because the company suddenly run out of stocks? Moreover, how does it get updates on the latest trends and the newest products that would let them develop new products or services to push sales?
The best thing about it all is that the effects will last long after the storm has passed, and this will help companies emerge more agile, more efficient and stronger and definitely more profitable. Focusing more on consumption behavior and applying metrics to know what is selling and what is not, allows a company to focus on its core procurement material that is to say on the 80-20. By doing so, the company starts cutting cost by trimming the unnecessary fat coming from slow-movers and by that liberate their stock levels and cash flow. Having done the first step, allows companies to focus on the second step which involves the focus on the biggest bulk of the purchases. Focusing energy there allows the company to have more accurate forecasts which allows for a larger room of maneuvering which will eventually lead to reducing prices either organically through getting discounts on bulk purchases (which is by the way the least preferred methods) or by reviewing prices from existing suppliers; or inorganically by widening the suppliers’ pool which allows the company to tap to new resources and most probably better prices. Then comes the innovation phase; ignoring innovation is like giving a death sentence and for a company to be a leading innovator, it always needs to be the first; the first in delivering new products and ideas and the first in getting the newest products and services out there that can help the innovation process. The only department that is well qualified to support any company on this quest is the procurement department because of all the departments, those are the people that are in the most contact with the outer world of suppliers and they are the relationship builders and a company can rely on them to always bring what is best out there.
This is just a sample of what procurement can offer to any organization in terms of efficiency, optimization and innovation. Given the right treatment and the needed authority a procurement department can offer much much more with much less resources than other departments and most importantly in an ingenious way that can always ensure a win-win situation for all parties. At the end of the day, a company has to decide as to whether it only wants to survive or to lead and how it wants that done. For any decision taken there will be an opportunity cost and a company should always make sure that they are paying the “best” cost. If anyone has doubts regarding the effect of supply chain, just take a look at Toyota….