With the recession at its height, last year was a tough ride for most companies. The New Year rang in with a brief glimmer of hope that the recession was officially over, only to be followed by stern warnings that the economy would continue to suffer aftershocks throughout 2010.
With most businesses having made aggressive budget cuts last year – from staff layoffs and business travel bans, to the elimination of virtually all “perks” – it may seem to some that there is little fat left to trim. According to research firm Gartner, in 2009, CEOs initially placed cost cutting at the top of their priorities to cope with the sudden and severe recession.
In 2010, however, the focus for the vast majority of business leaders is a return to revenue growth.
“GASPING FOR GROWTH”
“Business leaders are gasping for growth after a long period holding their breath,” says Mark Raskino of research firm Gartner. But supply chain analyst AMR Research, a division of Gartner, warns that breakdowns in companies’ supply chains could threaten that recovery.
An AMR survey of 150 global businesses found that 44 percent of executives believe the recovery cycle is the biggest risk in 2010. Executives cited potential commodity price increases, limited internal skills after workforce reductions, and problems meeting new demand with constrained capacity, low inventory, and transportation constraints as their chief concerns.
“Even as the economy begins to recover, the impact of the recession on manufacturers and retailers will be long-lasting,” explains Noha Tohamy of AMR Research. “Global supply chains will continue to face major risks in 2010 and beyond. As such, designing a supply chain risk management strategy is still crucial.”
Paul Cowley of global procurement finance specialist, Basware, cautions businesses to re-evaluate all areas of operational performance and supply chain tactics.
“When headcount reductions and unit cost savings are harder to realise, businesses must turn their attention to address more systemic inefficiencies,” Cowley says.
He says an unrelenting focus on cost cutting and uneasy relationships between finance and procurement professionals further combine to create an environment where supply chain risks, if left un-checked, can threaten companies’ stability.
“As cost reduction and control becomes the ‘new normal’, automation will continue to be a key component of realizing cost savings via operational changes,” he adds. “Organizations that will thrive going forward will be those that lift themselves out of purely reactive cost cutting directives and begin to think more strategically, adding a more systemic approach to address supply chain risk.”
BENEFITS OF PROCURE MENT
Though the advice might seem obvious, Professor Adrian Done of Barcelona’s IESE Business School says that, in spite of a high-risk economic environment, CFOs are failing to recognize the importance of closely managing supply chains through procurement. Research conducted by the university, in conjunction with Indiana University’s Kelley School of Business, found that less than a third of finance executives believe procurement has a significant impact on financial risk exposure.
“Businesses today are defined by their supply chains and some of the business failures of the last 12 months point to this as a root cause,” Done explains. “Finance departments across the globe have been guilty of ignoring the real value that their procurement teams can bring for decades now, so there is real truth in the suggestion that CFOs aren’t making the most of what can be an invaluable asset in the fight against the recession.”
He added, the subsequent finding that only 46 percent of the 100 global financial chiefs recently surveyed by the university see real integration between purchasing and finance processes is particularly alarming. “This represents a major break between two departments that should be working closer than ever to combat the downturn.”
If companies are to survive the turbulence of this year’s economic recovery, then more effective collaboration with key suppliers is critical, according to McKinsey. This is particularly true as CFOs’ traditional budget cutting options narrow.
THREATS TO RECOVERY
Fostering closer relationships with preferred suppliers is especially critical to helping companies identify operational efficiencies and potential cost savings, as well as the source of potential threats.
For example, new environmental legislation taking effect in the UK in April will require companies to improve operational efficiencies to reduce their energy consumption and associated carbon dioxide emissions. Those firms that fail to comply with the law will be subject to penalties equal to as much as 10 percent of their turnover.
These types of regulations mean businesses may have to re-negotiate the terms of their contracts with energy suppliers and put more pressure on electricity and IT providers to deliver energy efficiency products – or be prepared to look elsewhere.
The increasing threat of climate change to developing nations, such as China and India – core manufacturing bases for many big retailers in the west – should also be a consideration.
Currency-driven inflation and the weakening US dollar pose other risks that could interrupt the supply chain or create a logjam of orders, thereby reducing operational efficiency and increasing costs.
Rising commodity prices before the crisis, for example, led to the stockpiling of excess inventory. Now, however, falling commodity prices give customers an incentive to postpone orders and await better deals.
Meanwhile, a new factor – the dash for cash – exacerbates today’s difficulties, as the evaporation of traditional financing channels leaves companies desperate to shed inventory, reduce working capital, and squirrel away cash, according to McKinsey’s Christoph Glatzel. “One company’s working-capital reductions are another’s cancelled orders.”
The firm reports that some of its clients are establishing supply chain “war rooms”, with business leaders across production, procurement, logistics, and sales departments, to enable them to make fast decisions to cope with potential problems. These teams meet weekly, or even daily, to devise near-term operational plans.
“As companies rethink the way they plan, they must also learn how to act on the resulting decisions more quickly and flexibly,” says McKinsey.
“Remember that, for many organizations, a return to growth could, paradoxically, close the window of opportunity to improve the supply chain, so companies should take advantage of this time to work more efficiently with their partners.”