Cost Control and Reduction are the “New Normal” for Supply Chains

Nov. 19, 2009
A new global study on supply chain risk management identifies cost control and reduction as the “new normal.”

The relationship between businesses and suppliers is hanging in the balance as cost-cutting options narrow, according to a new study written by Mark Frohlich, associate professor of operations management at the Kelley School of Business, on behalf of Basware, a provider of purchase-to-pay solutions. The analysis shows that chief financial officers (CFOs) and chief procurement officers (CPOs) of large organizations continue to struggle, despite reports of the economy beginning to lift out of the recession. The report shows that they continue to apply existing approaches in cost control to tackle the ongoing demands of a tough economic climate.

Following a study of CFOs conducted in June 2009 that showed only 28% of businesses associate financial risk with procurement, the study examines how large organizations are struggling with risk evaluation and cost control. Cost control and reduction has become “the new normal” going into 2010, with the urgency for reactive cost-cutting measures continuing to supersede longer-term investment-driven directives. The report also identifies a growing trend of increased levels of finance and procurement collaboration as well as transparency among businesses seeking to overcome finance and purchasing challenges.

Key findings include:

• Risk not reward—The majority of respondents are aware of the instability caused by constant cost-cutting efforts in the supply chain, and they are struggling to find another way to meet their business goals. Organizations are also focusing on the discrete risk of a major disruption, while failing to address the more likely and potentially disastrous scenario of the sequential risk of incremental, smaller problems that arise in the supply chain.

• CFO / CPO tensions—Departmental tensions between finance and procurement is common, though the absence of good relations is regretted by both CFO and CPO respondents. The lack of collaboration between these groups poses clear risks as spend visibility is vital; however, both finance and procurement professionals see benefits in improving relations. There is a clear emerging trend toward using technology as a way of overcoming operational challenges and harmonizing ”buyers” and “payers” within the business.

• Automation needs—The need for urgent tangible cost savings place automation of finance processes at the forefront of business IT needs. The report shows that procurement is more likely to make an impact on commercial goals if high levels of automation and integration are applied in tandem.

• Neutral outlook, open future—Views taken on the state of the economy show that there is little confidence moving into 2010. Organizations less impacted by the downturn treat the climate as ”business as usual,” while those companies that have been more challenged say they see no green shoots.

The study also shows that a tight and embattled commercial environment is driving large businesses to seek support from peers and the wider market in order to resolve the challenges of supplier stability, cost control and future environmental and financial legislation pressures.

According to Frohlich, “Businesses are looking for ‘tsunami’ events in the supply chain but fail to keep track of the ‘soil erosion’ that takes place day-to-day. This mentality is a big disruption as decision makers fail to see the sequential risks of suppliers struggling to meet demands, while obsessing about discrete insolvency episodes and their impact on short-term operations.”

Basware’s Ari Salonen, general manager, North American market, says, “As cost reduction and control becomes the ‘new normal,’ automation will continue to be a key component of realizing cost savings through operational changes. However, when headcount reductions and unit cost savings are harder to realize, business must focus on addressing more systemic inefficiencies. Organizations that will thrive going forward will be those that lift themselves out of purely reactive cost-cutting directives and begin to think more strategically, taking a more systemic approach to address supply chain risk.”

Basware recommends a three-point plan for CFOs and CPOs alike:

1. As cost-cutting options narrow, finance and procurement must utilize each department’s expertise to find a way forward. CFOs need the knowledge residing in the realm of the CPO to fully grasp the issues involved, and likewise, CPOs will need to take a more active part in formulating corporate strategy and be more innovative in executing it across the supply chain.

2. It is imperative that organizations push levels of spend visibility, cost transparency and general openness to unprecedented levels in order to unleash significant new areas of cost savings. Only once an organization has 100% spend visibility—both direct and indirect—can it make informed and effective financial decisions.

3. Develop integrated and collaborative relationships with first- and second-tier suppliers to better evaluate and control risk in the supply chain. Fostering closer relationships with preferred suppliers will enable an organization to tap into supplier expertise to identify the source of potential threats.

The full report can be accessed by clicking here:

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