Deep Cut Cost Reduction

One facet of procurement performance is the ability to cut the cost of purchases without impairing the quality of goods and services or any other aspect of the requirement. It is not uncommon to find buyers with a cost savings target. It often has an air of gentility about it, rather than a demanding objective. An annual savings figure of 1% of purchase value is a target encountered for procurement departments. It usually requires an organisation to encounter difficult trading conditions or for HM Government to decide that public expenditure will be subjected to severe constraints, before ‘deep cut’ cost reduction becomes a demand. This is a quite different mind set, not only for procurement but for the organisation.

It is impossible to set a cost savings target in a general context. Our skill is to work with a client and ascertain, in their environment, what ‘deep cut’ cost reduction really means. We also need to carefully determine what cultural, behavioural and policy challenges lie ahead. It also requires the psychology of tackling suppliers to be thought through.

deep cut

An analysis of past practices is imperative. This will help the thinking regarding possible complacency, outdated attitudes and practices and a failure to negotiate exacting deals. The range of professional skills and knowledge that can be applied will have to be identified. For example, the lack of supply market knowledge is a severe inhibitor to cost reduction. The natural competitive forces may not have been applied. The reluctance of stakeholders to embrace change is certainly an inhibitor. This reluctance can emanate from quality management, production, service providers (such as IT) and even Directors who have become wedded to specific suppliers. Examples of the latter include the annual audit and fees, marketing and consultancy.

So, what have we encountered? Situations have been dealt with where more than 20% has been delivered as cost reduction within one financial year. The procurement activity can include specific categories of purchases. Construction and facilities management are often ripe for a challenge. Consideration of partnering can make a material difference when there is the upside of incentives, coupled with the downside of damages for non-performance. Close co-operation with those writing specifications can reap enormous dividends. The avoidance of prescriptive specifications and move to output specifications enables suppliers to promote unique solutions.

Deep cut cost reduction will require advanced negotiations skills. This is a quality not lacking in mainstream suppliers, but often inadequate in procurement. The lack of cost knowledge, overhead allocation, profit and contingency provision all need searching out and negotiating to arrive at the best deal.

Our experience shows clearly that when a procurement department is placed under an exacting performance regime, they will rise to the occasion. We can supply the support, knowledge, skills and motivation to succeed. Procurement remains the last goldmine in many organisations. Are you ready for the challenge?