Good Captains and Calm Seas

Five ways CPOs can prepare for an economic downturn.

It might not be called a recession yet, but all the symptoms are still there. During such uncertain economic environments, a company's leadership is often looked to for answers. When it comes to purchasing, that search usually reaches the chief procurement officer (CPO). But you have to wonder, what can they really do?

That was the question Emptoris Inc., a provider of enterprise supply and contract management software, recently posed to a panel of experts with backgrounds in finance, operations, procurement and technology. Lately answers seem to be few and far between, but the panel agreed on a few important steps that CPOs can take immediately to gain greater control over spending and cut costs -- without reducing operational effectiveness. Here is what they came up with:

  1. Mitigate risk. Bad sourcing decisions or supplier issues can be addressed and weathered in a good economy. But they can be devastating in a bad one. The biggest mistake companies make is looking strictly for lower costs, rather than evaluating overall value with suppliers. Outsourcing and low-cost country sourcing can result in unforeseen downsides, so they demand a greater role for evaluating overall value and capabilities when sourcing for lower cost.
  2. Mitigate inflation. Inflation is the X-factor in this economic downturn, and getting ahead of it is critical. Renegotiating contracts with target suppliers and sourcing for value are immediate steps companies can take to help insulate themselves. In sourcing and contract renegotiation, the first priority should be a focus on high-value, high-risk areas such as transportation and fuel. In addition, focus on categories where you can negotiate lower prices with suppliers without incurring higher costs elsewhere or damaging your long-term interests around delivery, performance and availability.
  3. Renegotiate and enforce contract compliance. Whether it's enforcing negotiated pricing, realizing quantity discounts or ensuring quality standards and associated penalties and discounts, compliance is even more essential in a recessionary environment. In addition, key suppliers may be more willing to renegotiate contracts in these environments. Technology can help link contract terms to spending and thus reduce leakage -- and in linking contracts to supplier performance to track commitments versus actual performance metrics.
  4. Gain spending visibility. A company can't control what it can't see. Gaining global, enterprise visibility into spending is much easier now than it was even a few years ago with the advent of automated spend analysis technologies. These technologies can aggregate data from dozens of different systems, including every major ERP platform, and can analyze and drill down on spending along dozens of different dimensions, including by commodity, cost center, general ledger account, geography, time, payment terms, etc.
  5. Do more with less. In a recession, budgets are being trimmed and headcounts reduced, yet with global competitive pressures your department may be asked to do even more. Focus on making your department more efficient through the smart application of technology. But also be cautious. There are risks associated with the selection of which technologies to implement, so go with proven, best-of-breed technologies that have been successfully tested.

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