The savings paradox
From the December 2020 print edition
Have you ever run out of gas while driving? I have, multiple times. Like vehicles, businesses generally run as long as sales revenues, profitability and cash flows don’t dry up. As a result, departments such as procurement rarely take centre stage except for when negative issues arise or specific measures, such as cost control, need to be implemented.
Even well-executed cost reduction strategies and projects may not be viewed as positive.
Periodically, procurement is tasked with the reduction of input costs over and above established targets. This is especially true during tough economic times. The thought is that if you cannot increase the dollars coming in, you need to decrease the dollars going out. Simple, right?
Putting aside the numerous challenges that exist including available resources, active contracts or current market conditions, one underlying problem will likely remain: the savings paradox.
Normally, one would expect that as savings and/or overall benefits increase, the appreciation for these actions would increase at roughly the same rate. Even if no further savings or benefits were achieved, it could be argued that procurement must have been doing its job to ensure the company’s competitiveness.
After all, one of procurement’s main objectives is to continually look at ways of lowering the total cost of ownership for all products and services procured.
Unfortunately, procurement will likely come under fire regardless of the outcome. Why is that so? There is often a gap that exists between the expected responses and the actual opinions that are formed by other departments – this includes the executive leadership. If we look at the three most common outcomes, the disconnect becomes apparent.
- No cost reductions – “Procurement did not do their job”;
- Partial cost reductions – “Procurement did not try hard enough”; and
- Cost reduction targets achieved – “Procurement was obviously not doing their job in the first place.”
Although deflating, there are two specific actions that can be implemented to tackle this issue – these are documenting and elevating.
What happens in the procurement department daily is not as apparent to individuals and leadership outside of the department. Documenting the department’s accomplishments on a regular basis serves as one of the most important ways to bridge this gap. Some individuals will not see the value of documenting their successes as they falsely believe that when required, they will be able to recall how they contributed to the organization’s success.
When the time comes, they are often left struggling to remember what happened last week let alone years ago. Without proper documentation, the benefits that procurement realizes through competitive processes, negotiating favorable contract conditions,
or optimizing inventory levels will continue to be overshadowed by perception and opinion rather than by fact.
Once proper documentation practices are in place, the focus should turn to elevating procurement’s perceived value within the organization. This can be accomplished by consistently reporting high-level results to the executive team through a supply chain leader or an executive sponsor. If no such leader or sponsor exists, the finance team may be able to provide the necessary help or direction given that many of procurement’s activities directly or indirectly affect the company’s bottom line.
As procurement’s organizational journey continues to evolve, so do perceptions. Through concerted efforts to highlight procurement’s successes and increase understanding from the top-down, positive impacts will soon outweigh any minor issues or setbacks resulting in a fundamental shift of opinion.