When times are hard, the only way a company can dig itself out of a hole is to either innovate or to cut costs – but they should only cut the right ones.
The bright, shiny object that is marketing won’t rescue ailing businesses during a recession, when there are no new customers to tempt. Increasing your prices will be off the table for a while too in a deflationary environment.
So, in today’s very uncertain economic outlook, driving value through better spend management could make all the difference.
A smart expense reduction programme is going to be way more conducive to an organisation’s long-term survival than being forced to let your best people go, or scrapping any planned strategic capex.
And therein lies the problem. Once you get below the £25 million annual turnover mark, businesses rarely have any strategic procurement expertise in-house. This is an entirely different role and skill set than just day-to-day transactional buying (which is essentially just an administrative role).
While every manufacturing SME knows what they sell, hardly any truly have a grip on what they buy.
In the words of perma-tanned Welsh crooner Sir Tom Jones, it’s not unusual. And when you think about it, this is madness.
Let’s take your typical medium-sized manufacturing business with a £10 million annual turnover and around 50 employees.
As a rough figure, around 60% of their turnover will consist of goods and services purchased from external vendors:
- Raw materials
- Operating supplies (MRO and consumables)
- Sales, marketing, administrative and regulatory expenses (SG&A)
- Logistics & distribution
Add on top of this about a quarter of their turnover, which is made up of labour costs in the form of salaried employees and temporary workers.
Which then leaves circa 15%, or £1.5 million, left over as pre-tax profit.
So, this then begs the uncomfortable and rather astonishing question of who is managing the £6 million they are spending on goods and services from external suppliers?
Just like a company wouldn’t send their EHS Engineer or HR Manager to lead a customer field sales visit, neither should these team members be allowed anywhere near a supplier or contract negotiation.
And yet they do. This is crazy.
So, let’s examine the £6 million of spend that’s most probably being managed by a hotchpotch of stakeholders who are not experienced procurement professionals.
Let’s run some rough calculations.
About half of this spend (£3 million) will either be:
- Under contract, and therefore untouchable for now. Many facilities services such as security and cleaning will fall under this umbrella, for example.
- Or heavily driven by the price of raw materials. The best buyer in the world won’t be able to negotiate steel, copper or electricity below the market price.
So, the balance of the remaining £3 million is what we’ll call “addressable spend” - i.e. that which can have an immediate impact.
At least 5% savings should be achievable on spend which has never been managed, negotiated and interrogated by an experienced procurement professional. This is actually a fairly conservative number.
On a business that turns over £10 million and makes £1.5 million (15%) in pre-tax profit, the £150k that a skilled procurement professional could quickly deliver to this organisation in savings would represent a 10% increase to its bottom line.
Not bad in a time when sales are flatlining at best, or quite possibly tumbling!
So, if you’d never heard of Procurement or didn’t know what we did, then I hope you can see how we could be a valued partner to you during these unprecedented times.
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