For most companies, supplier spending is their single largest cost — about 50% of revenue for manufacturing and 30% for services. And yet, this major contributor to profit and loss is often buried as many companies have poor visibility into their procurement costs.
But what exactly is “supplier spending”? In procurement terms, it’s the money companies spend on goods and services supplied by outside parties. The goods and services are commonly divided into “direct categories” (such as raw material and goods produced within a company or outsourced), “indirect categories” (such as office supplies, IT software packages, and audit and legal services), and capital expenditures (for such things as equipment as real estate). In companies where it’s appropriate, supplier spending can also include goods bought for resale, such as food and clothing.
Currently, there are three global issues affecting supplier spending — globalization, digitization, and activist investors — that could affect earnings. Given these issues, CFOs should scrutinize their supplier spending and collaborate with chief procurement officers to turn these risks into opportunities.
Although most CFOs understand the logic of needing to focus on supplier spending because it’s one of their largest costs, many assume their chief purchasing officers have this area covered. Thus, many finance chiefs don’t understand what good supply management looks like. But CFOs would be wise to critically examine their procurement organizations given three prominent global trends.
Today’s geopolitical landscape has globalization on the defensive. In 2016, populist movements were in the forefront — from Brexit and unfavorable views of the European Union to Donald Trump’s anti-trade nativism.
This anti-globalization backlash is putting pressure on supply management. With globalization on hiatus, many companies are rethinking their predisposition for globalism and shrinking the footprint of their supply base to embrace localization.
As GE’s Jeff Immelt says in his 2017 annual letter to shareholders: “[A]ttitudes on globalization have been changing, and it is important that we remain agile to move on our own. There is a strong trend toward economic nationalism all over the world. Governments will execute heavy influence over the economy, with an even stronger focus on local job creation.” As a result, GE has adopted a strategy of making their products where they sell them. This approach not only mitigates currency risks, but also reduces transportation costs.
This approach has major implications for your supply base. Instead of consolidating volumes and awarding your business to a few global suppliers, you may now need to find and develop new suppliers in multiple markets to support local manufacturing.
Digitalization is at the forefront of the C-suite agenda. This trend includes improving productivity, integrating procurement and financial processes, and enabling advanced analytics. New technologies, such as robotic process automation, are replacing people with applications that streamline and integrate transactional procurement and finance processes from requisitions and ordering to invoicing and payments. These same tools have the power to fill data gaps created by multiple enterprise resource planning systems to create detailed and nearly real-time spend data cubes across the entire organization.
Machine-learning tools provide powerful opportunities to monitor organization and supplier compliance. Even more intriguing may be the impact of blockchain, which allows suppliers and companies to be integrated in a way that speeds transactions and provides ready access to a range of information that can enrich business insights.
One global consumer goods company we know of, for example, is in the midst of transforming its digital capabilities in finance and procurement. Made up from a portfolio of digital strategies designed through the lens of end-users, the program is not only resetting external and internal costs, but also enhancing internal controls and reducing friction points throughout the business.
Data housed in fragmented IT systems throughout the business and across the globe are captured, normalized, and packaged in ways that provide unprecedented insights that can be leveraged to curb spend demand and negotiate most favorable terms. For example, travel and entertainment cost is no longer just managed through expense reports and vendor and spend summaries. Instead, finance and procurement now manage travel and entertainment with a comprehensive view based on when travel was booked, the routes taken, the duration of the trip, etc. Such data allows for better informed corporate policy and strategic procurement
Private equity and hedge fund activists and the rising number of mergers and divestitures are forcing the C-suite to uncover new sources of value. As most companies’ single biggest cost, supply management is expected to be a leading contributor to restructuring efforts and merger synergies.
One Fortune 50 manufacturer, for example, transformed its global supply management capability just in time to become the largest contributor to cost synergies for two of the industry’s largest mergers over the past eight years. In addition, many private equity firms are turning to supply management for near-term cost reductions as they restructure their portfolio companies.
The CFO and CPO share the unique capability of being able to see into and influence cross-enterprise activity and supplier spending. Working together, they can effectively manage the drivers behind this cost and make a significant impact on the P&L statement.
The CPO can affect pricing by negotiating with and selecting suppliers, while the CFO can influence usage or quantity through budgeting management. Focusing on zero-based budgeting encourages this teamwork as it goes beyond setting cost levels to determine how to influence the factors that affect costs.
Proactive teaming between the CFO and CPO is integral to building a world-class supply management capability focused on capturing a competitive advantage from the company’s largest cost. According to our firm’s 2017 Assessment of Excellence in Procurement study, these leaders are capturing a wealth of value, including nearly three times higher return on supply management assets. In addition, they are seven times more likely to have a high impact from innovation and four times more likely to have a high impact on structural total cost of ownership.
This teamwork can turn the risks of anti-globalization, digitalization, and activist investors into opportunities to capture a competitive advantage. To get started, forward-thinking CFOs should reach out to their CPOs to discuss the capabilities, performance, and improvement opportunities and find innovative ways to create a strategic partnership.
Mike Hales is a partner in the operations and performance transformation practice and Jeff Postma is a partner in the leadership, change, and organization practice at A.T. Kearney, a global management consulting firm.