Managing to cut costs

Supply Management, Jul 31, 2008 by Buchanan, Mike

SOAPBOX

Are purchasing professionals (PPs) suitably equipped to fight the inflationary pressures in the economy? Some may recall the 1970s when price inflation in the UK peaked at 26.9 per cent.

Purchasing was, arguably, simpler then. As long as the typical purchasing department supplied its organisation with materials and services in a timely fashion, and kept costs within budget, it would attract little interest or criticism. Ideas such as corporate social responsibility and supplier diversity were not on the agenda.

But now that rising inflation has returned, it will be up to PPs to manage costs expertly. Are they up to the task?

I reflect on this point in my book Profitable Buying Strategies. My conclusion is that PPs aren't managing costs well and using a very limited range of tools and techniques.

I have identified 10 key areas of cost reduction that need to be recognised and acted upon if cost management is to be of a high standard.

First, PPs need to adopt an appropriate buying philosophy and psychology. These underpin all cost management activities. I have met many buyers who don't have the mindsets to be effective cost managers. They have stumbled into purchasing and they're unsuited to the task.

Second, we have to examine the basics of procurement: the buying portfolio, Pareto analysis, the buying cycle, total cost of ownership and so on. Although there is a widespread understanding of such concepts, this is not being matched by the intelligent application of them. Related key points include the use of effective tools and techniques and the use of a wide range of changes to deliver cost reductions.

It is important for managers to make use of extensive market testing, which is at the heart of most successful cost reduction initiatives.

We should also consider the use of appropriate outsourcing (tactical, strategic or transformational) and insourcing - bringing inhouse what has hitherto been carried out by third parties.

Then PPs should develop and use a range of negotiation tools and techniques. These include knowledge of effective negotiation, minimum and maximum settling points, and 'the killer question'. Get advice on vendor preconditioning and making the most of your buying power.

It is important to understand contract law. Every PP should have a contract register template with sections on the terms of a contract, its duration and termination. Also, consider e-procurement. Far too many are resistant to it.

Lastly, look at organisational issues. This covers areas such as politics, buying development stages, buying capacity and capability through employees, interim managers, and consultants.

My message to the profession is - Let's take a fresh look at our cost management activities and employ a far wider range of tools and techniques to reduce our organisations' costs.

Mike Buchanan is chief executive of LPS and author of Profitable Buying Strategies, published by Kogan Page, £35. A full version of this article appears on www.supplymanagement.com