One of my customers is suffering on multiple levels from the economic/financial mess.

First off, their sales have gone down substantially over the last few years, resulting in layoffs, site closures, and other downsizing initiatives.

Second, as credit dries up, banks have decided that companies with slumping sales are a low priority. Harder access to credit causes all sorts of problems, and as cash flow becomes an issue, suppliers begin to enforce deposit terms, charge late payments fees, etc.

Another thing that becomes difficult under these conditions is strategic sourcing. Right now suppliers are extremely cautious when it comes to extending credit to new customers, and when credit scores are poor, suppliers are actually turning down business.

These conditions make it much more difficult for a company going through tough times to source strategically and uncover the cost savings opportunities needed to help dig out of the hole. Even when opportunities are uncovered, restrictions such as shorter payment terms, deposits, or other punitive conditions are required to implement the new agreement.

Having success in strategic sourcing under these conditions is difficult, but not impossible. The most important thing is for the company to formulate a game plan, learn new best practices, adapt to change, and respond to the new conditions quickly.

Unfortunately, many large companies that got into this mess are unwilling to do any of these things.

Let’s take the example of an electricity project I recently worked on. For the most part, electricity is a commodity item. With some exceptions, there is little difference between service providers, and other than ensuring your third party supplier is not a fly by night operation, electricity is electricity and the service you get from a third party will be about the same, if not better, than your utility.

The hardest part to achieve savings in electricity with a big company comes in the data collection phase, where you need to collect invoicing/account information for every customer location, then segment them out by region or state for bidding processes. Since electricity is a commodity item, reverse auctions are effective at driving down to the lowest price by allowing suppliers to engage in a bidding war. The only caveat is that because contracts need to be executed fairly soon after the bid takes place (prices change daily), any legal review of contracts needs to be done before the bid takes place.

In the case of this customer, legal was unwilling to look at multiple contracts before the quote, making a reverse auction impossible. They didn’t feel they had the bandwidth to look at every agreement, only the one for the supplier we decided to move ahead with. Legal also insisted on adding language to the contracts that provides little additional protection but did result in significant delays in the process (in some cases over a month).

In addition, several new end users that previously had ignored their utility bills came out of the woodwork requesting meetings to understand the savings, how we get paid, and asked that all decisions be put on hold until their considerations are met.

Another company I work with has also fallen on hard times, which have resulted in hundreds of store closures over the last few months. They recently decided to invest in an electronic RFP tool to help streamline the sourcing process, which is a great idea! Unfortunately, as we explained some of the best practices behind the tool, including that even with an electronic tool you should “talk to suppliers”; we were met with extreme resistance by people high up the chain in procurement. “Why would we use a tool if we still need to talk to suppliers? This product should help us save time!”

Simple commodity purchases getting tied up in committee, inflexibility of legal departments to change their process so more effective sourcing techniques can be utilized, and the avoidance of best practices (and ultimately, more cost-effective solutions) in the name of “saving time” are all something you might expect to see is a Dilbert cartoon. What ever happened to that guy anyway? Still, it begs the question, Are these companies too big to fail, or when companies get this dysfunctional should they fail?
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Joe Payne

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