Manufacturers failing to meet cost cutting requirements

Manufacturers increasingly desperate to cut the costs of purchased goods and services are heading for problems if they don’t take advantage of proven IT and management processes geared to making cost savings strategic. That’s the top line conclusion of a report from the London Business School in association with ‘spend management’ IT firm Ariba, just released. A survey of 200 purchasing heads across Europe’s largest organisations, conducted for the two, finds companies bought less during 2002 than 2001, and that almost all are now looking for further sharp reductions in quantities and item costs this year – but with the trends showing failure to deliver. 55% of companies say that the economic slowdown caused them to buy fewer products during 2002, leading to an average spend reduction of 12%. And for this year, the survey shows nine out of 10 wanting to reduce unit prices further, compared with half last year. Also, 78% now say they want to reduce their numbers of suppliers, with the average being 10.3% at next contract negotiation. But 82% of suppliers reckon that even with software and agreements in place, companies’ employees will still purchase off agreement. The Ariba/LSB report concludes that despite target-setting, cost cutting through better procurement management is not happening, and not likely to happen, fast enough. Says John Watton, Ariba’s marketing director, “Businesses seem to be going for ‘panic-saving’ as the screw tightens on the European economy… They haven’t been successful enough in reducing their spending… They’re not thinking strategically about their businesses.” And the result: “The economy is already feeling the effects of cost-cutting from 2002 but it looks as though we’re heading for a ‘double-dip’ in spending as businesses try and negotiate even more ferociously in 2003.” Ariba and the LBS are of one mind about this. Clearly costs have to be cut, but over-reaction, whipping suppliers and then failing to follow up, could hurt all round. And it’s avoidable by thinking strategically, making purchasing a board level concern and supporting new processes with IT that enforces compliance. “Tactical moves to tackle this so far have not been successful, because they don’t deal with the problems holistically,” says Watton. And while there is a slight increase in the numbers of purchasing managers now reporting to the board (53% in 2002 across Europe (33% in the UK) as opposed to 48% in 2001), on its own it’s not enough to up the ante of ‘spend management’. Says Jamie Anderson, programme director and researcher within the Centre for Management Development at LBS, “In far too many companies, purchasing is an admin role… Companies have to make purchasing strategic if the want to succeed. And now is the time they have to do it. “Last year they failed to meet their targets; they took the tactical approach, negotiated contracts to get the savings but weren’t able to follow through – because 82% of them say their people were buying off contract. They need management governance and systems to do this. Otherwise they won’t succeed.” And while both Anderson and Watton emphasise that IT alone isn’t enough, they do point out that with the scale of savings to be had and the criticality for survival and competition of those savings, the return on investment from management and IT initiatives would be compelling.