Supply chains for businesses, big and small, are finding themselves under pressure to reduce costs, improve efficiency and assist in the maintenance of a steady cash flow.
World-class procurement organisations operate at a nearly 20 per cent lower cost, as percentage of spend, than typical companies, a 2014 report by the Hackett Group revealed.
Despite this, the report, “How world-class procurement organizations outperform; focus on becoming trusted advisors, driving supplier innovation”, highlighted a 17 per cent decline in the ability of these companies to generate savings in 2014. It went on to warn that, with this decline likely to continue in 2015 alongside an expected four to seven per cent increase in savings for “typical” procurement operations, the gap between the two was likely to close up.
However, those within the supply chain have found themselves questioning whether a closing of the gap between world class and typical is set to continue.
Milan Panchmatia, director of 4C Associates, the procurement consultancy, says that while it is true that the gap is closing, he believes with the economy back on an upward trend, the gap will once again widen.
“Much of the closing up has been down to the hit the economy has taken in recent years,” he says. “But with the world looking more positive, bigger firms will look to expand business through the provision of transformative offerings.”
The importance of tying procurement into the overall business strategy is highlighted by Anne Marie Kilkenny, partner at Oliver Wight EAME.
“In the past five years there has been a greater focus on strategy,” she says. “It’s all about the difference in how people run their organisations. Those that have procurement synchronised with their overall business have a long-term strategic focus.”
Looking ahead from this, supply and procurement operators need to consider how they can improve upon existing, and build new, relationships with suppliers. And from there the way this can boost return on investment.
Improved collaboration is a key issue, both through further integration of the sourcing and procurement departments within the company, and through strengthening relationships with suppliers.
“When looking for new suppliers, we look to build the relationships first,” says Panchmatia. “This gives us foresight when making a decision as to what each option can offer us in terms of RoI.”
2Degress provides a platform specifically aimed at encouraging collaboration and relationship-building. CEO Martin Chilcott says that the system also links supplier with supplier.
“Suppliers use the platform to work with one another,” says Chilcott. “And this aids both parties in not only cutting costs but also in reducing risk.”
Greater collaboration between supplier and sourcing department is pivotal, says Panchmatia. Organisations need to look at what the supplier can do for them and how this boosts RoI.
“Because at the end of the day, the pressures on sourcing and procurement departments is the same as it ever was,” adds Kilkenny. “They need to get the cheapest cost, without sacrificing efficiency and quality.”
Collaboration with suppliers was brought to the fore earlier this year when it was announced that groceries code adjudicator Christine Tacon was to launch an investigation into Tesco’s behaviour towards suppliers. Tacon went on to say that this investigation could furthermore be extended to other retailers if evidence of malpractice comes to light.
In the light of this, there has been a lot of soul-searching within the industry as to how it can improve relations with not only suppliers, but where necessary repair reputations among consumers – and maintain those reputations that are unblemished.
Panchmatia says that 4C Associates does a lot of work within the procurement sector focusing on not only the basics but also the culture within which the sector operates.
“Yes, we can deliver savings by punishing the supplier,” he says. “But the industry needs to realise that it must think strategically with an eye towards the long-term.” And there’s those two phrases again: strategy and long-term.
“Use the stick and in the short term you will make the saving,” he says. “But the saving itself is only temporary – you won’t build a partnership; that will come back to bite you. But plan properly, develop relations and you will make the bigger savings in the long-term.”
Panchmatia says this of course is hard. Procurement departments are often under pressure to meet targets, and meeting this short-term goal can often be seen as the higher priority than long-term sustainability.
Chilcott says that one of the firms that 2Degrees worked with was seeing its suppliers turn to emerging markets where they could get better prices.
“They wanted to stop this,” says Chilcott. “There has been an exploitative culture for such a long time that it required the crisis of last year to make buyers realise this was the wrong approach. That ground swell and sea change from suppliers was needed to bring about the necessary change.”
Henning Holter, head of business development for Tungsten Network, the e-invoicing specialist, says that regardless of where a business sits in the supply chain, when a link comes under stress, the impact sends shock waves up and down.
“A greater awareness of the financial supply chain and the pressures faced by both larger businesses and their suppliers is required,” he says. “SMEs need to have a better understanding of the funding options available to them and larger businesses should be striving to support their suppliers by respecting payment terms.”
Kilkenny highlights the fact that there has been an increased impetus on ethical sourcing, and retailers of all kinds are taking it much more seriously.
“With social media and the internet, everything has become much more visible,” she says. “Consumers, particularly in the younger generation, are becoming much more aware of where their goods are coming from. And they want to know people are not being exploited.”
Chilcott adds that with social media thrusting any problem instantly into consumers’ faces, there’s no way of hiding wrongdoings. He believes this has provided a first, in that the supply chain has become something more than a vehicle for driving profit. It has become a marker for ethical practice.
Obviously though, such practices within the supply chain vary from industry to industry. For instance, the agricultural industry is more concerned with the environmental impact, but, says Chilcott, they will also be looking towards the living wage for workers.
“For the garment industry, there is an emphasis on risk management in terms of child labour and, again, living wage,” he adds. “Garment manufacturers trade on their brands, with 80 per cent of value tied to the name. So they need to protect this.”
2Degrees is working with one client to show them what a model factory looks like: “We are showing them how a happy workforce is both more reliable and more productive.”
This is important to get factory operators out of the mind-set of “the only way to win contracts is to drive costs down by cutting costs.”
Many companies spend time auditing factories only to come back 12 months later and find nothing has changed, he points out.
Panchmatia says that 4C is spending a lot more time trying to spot problems before they arise.
“If companies put procurement people in supply chains further down the line, they spot things faster,” he says. “For example, the horse meat scandal could have been avoided.”
And Kilkenny emphasises that increased vision along the supply chain is a must, especially as industry becomes more globalised. Risk, she says, has come much more to the fore and this risk can stretch right across the globe with a variety of conditions and climate’s coming into effect.
“With a longer supply chain comes a longer list of risks,” says Kilkenny. “Companies need to consider environmental factors, a key example being the Japanese earthquake and tsunami of March 2011.
“But there’s more: floods, political instability, hurricanes. All these factors need to be considered with fail-safes in place should an event of this kind arise.”
Chilcott believes we are in an interesting place: “The 21st Century has brought along a three billion strong middle class, and three planets worth of consumption.”
Public sector: Send it to the front line
Nowhere is procurement more under the spotlight, than in the NHS. The organisation has been tasked with reducing inefficiencies and finding savings that can in turn be pumped into frontline services – more doctors, more nurses.
Each year, the NHS spends more than £22bn on goods and services, typically accounting for 30 per cent of overall operating costs.
In response to efficiency drives, the Department of Health launched its Better Procurement, Better Value, Better Care – NHS Procurement Efficiency Programme. The aim of this was to harness the NHS’s purchasing power, reduce variations in prices paid for products of the same quality, drive efficiencies and share best procurement practice.
In addition to this, the government, last year, appointed Lord Carter to chair an NHS procurement and efficiency board, with the aim of helping the NHS to cut waste, save money and drive efficiencies which can then be spent on the much needed frontline patient care. It is hoped that through improving procurement capability, the NHS will be able to deliver £1.5bn to £2bn of efficiency savings by 2015 to 2016.
In his interim report, released in June, Lord Carter said: “I do not think there is any one single action we can take but I do believe there are significant benefits to be gained by helping hospitals, using comparative data, to become more productive.”
However, Lord Carter mentioned that he believed £3bn in savings could be delivered from improved hospital pharmacy and medicines optimisation, estates and procurement management (£1bn from each) by adopting best practices and modern systems for example, creating a tightly controlled single NHS electronic catalogue for products purchased by hospitals.