The last few months have certainly tested our ability to adapt to uncertainty. Realistically, no one knows how long this shutdown is going to last but presumably the peak will occur in the next 1-4 months. No matter how long the formal shutdowns last, economic recovery will be slow once businesses begin to reopen. So how can companies return to profitability as quickly as possible? Top line growth will be hard to come by in the early stages, so companies must look to back-office operations such as procurement to find creative ways to reduce operating costs. This post will highlight 4 ways that procurement can support those efforts.
Reviewing SOWs and Renegotiating Contracts
Spend drift is a common outcome of old or undermanaged contracts, meaning that extra services get tacked on over time or continue to be performed when they are no longer necessary. With operating environments changing so dramatically in a short period of time, companies need to be mindful of their changing needs and be cognizant of where purchases and services are no longer required. This will be especially true in areas such as travel, contractors, and facility services; chances are we won’t be traveling as much in the near future, and its entirely likely that we won’t be spending the same amount of time in offices. Now is the ideal time to review scopes of work and make sure they reflect the “new normal” so you don’t pay for services that are no longer needed.
A robust risk assessment model should be part of any developed supply chain and sourcing organization. Now more than ever, procurement organizations need to be mindful of the financial health of their supply base by assessing critical suppliers and components and assessing their risk exposure. Risk can be assessed through a multitude of lenses – by direct spend (products or services with the largest spend) or by profit impact (components or services that go into finished goods with the highest profit contribution but that may not have the highest direct spend). Understanding risk can lead to vendor consolidation and additional cost savings. By combining purchases, you can align spend to low risk suppliers, trading volume for price concessions all while reducing your risk exposure.
Focusing on Cash Flow – both yours and your suppliers
Assessing the financial health of your supply base as part of your risk assessment can also create new negotiation levers surrounding cash flow. Understanding your cash position relative to that of your supply base can create negotiation opportunities around payment terms, early pay discounts, and even supply chain financing programs where having cash on hand takes precedent over capturing price and margin.
Lastly, outsourcing is a tool that allows companies to remain lean, focus on their core competencies, and allows them to easily scale to their requirements while relying on the expertise of a 3rd party. It will be important to keep overhead and fixed costs low during the recovery period, and outsourced services can be scaled to meet your requirements depending on how quickly or slowly the recovery period plays out. In the procurement space, Corcentric can supplement your existing procurement team through a contingency model where savings are shared, incentivizing upside savings and minimizing your organizations up-front costs. In the coming months, that level of flexibility will be vital to getting back on track as we all try to return to normalcy and get back to growing.