Cutting Costs in Tough Economic Times

February 26, 2008; 06:10 AM

Philadelphia, PA - With unemployment at 5%, economic growth expected to average 3% in terms of gross domestic product growth through 2008, and exports up 12% over the last six months, things aren't as bleak as the national media would have you believe.

But the fear of a recession persists nonetheless. Consequently, amidst declining consumer spending, a global credit crunch, triple-digit dips in the world's stock markets, and heightened fears of a U.S. recession, right now every business is understandably looking for ways to cut costs.

That's the bad news. The good news is that there are plenty of smart ways to cut costs without any loss in performance or productivity.

In fact, the most obvious areas of savings are exactly the ones most overlooked!

Take the cost of doing business. Many business owners and managers forget that one dollar in strategic sourcing savings goes directly to your bottom line. And in hard economic times like these, it's important to remember that it would take $10 in sales to make that same dollar.

What can procurement service providers do when you need to preserve and shrink costs without eliminating resources?

Well for starters, they can reduce product and service costs, employ industry best practices, leverage up-to-the-minute procurement technologies and simplify source-to-pay processes-without taking the risk required to achieve results. What's more-while cutting costs, they create new opportunities!

Strategic sourcing involves a streamlined process that taps into the skills of the supply industry to optimize sustainable competitive advantage for the business and its customers. So, even beyond significant cost reductions, the process creates new business opportunities, improves quality, and develops access to new resources (and boosted sales).

Yet, most mid-sized companies lack the resources, disciplined sourcing practices, category expertise and spending power to negotiate and maintain competitive supply chains, according to the Aberdeen Group benchmark report, Strategic Sourcing in the Mid-Market Benchmark. Aberdeen estimates that such deficiencies cost mid-sized firms in the U.S. $134 billion a year in missed supply savings opportunities. In light of international concern over a long-term U.S. recession, the time couldn't be better for more refreshing approaches to cutting costs.

With these 10 (surprisingly simple) quick-reference tips on how company decision makers can benefit from strategic sourcing without losing finance and purchasing management support, here's some invaluable advice on recession-proofing your bottom line.

1. First and foremost, creativity is the golden rule in every aspect of your approach-- including the identification and qualification of suppliers, the geographical and logistical aspects of the supplier and company's clients, the sourcing strategy, and the development and negotiation of contracts.

2. In order to maximize savings, learn how to study up on less obvious aspects of the market.  Collecting data saves dollars! Is now the right time to source? Conducting a market assessment is essential in finding out the condition of the marketplace. Researching market conditions will help to determine the viability of a sourcing program.

Evaluate market price trends in the product area you intend to source. Ask:

Within the past 12 months have prices risen or declined?

Is supply scarce or is the product plentiful?

Note: Strategic sourcing companies like Source One have access to data and information that most companies cannot afford to acquire for every one of their strategic and non-strategic spends.

3. Examining (or re-examining) your sourcing strategy can be eye-opening:  At the rate the current market changes, it is essential to stay on your toes and constantly reassess your strategy. Be realistic about your requirements!

As circumstances surrounding the market vary, or the organization's objectives change, the sourcing strategy may need re-examining. Be equipped to revise the approach and reinstate concepts that may have been previously disregarded.

When developing the sourcing strategy, one of the first objectives should be to divide the requirements into minimum needs (aspects of a potential supplier agreement that must be met) and maximum desires (bonus features of an agreement that will prove valuable to the company, but are not "deal breakers").

4. Developing a supplier list always adds value: Have you accumulated a large potential supplier base? Doing so will increase the likelihood of unearthing original opportunity and savings!

A good rule of thumb is to authorize as many suppliers as possible. Restricting the prospective supplier list will reduce the chance of a profitable initiative. Accumulating a large potential supplier base will increase the likelihood of unearthing original opportunity and enhanced value. After creating a supplier list, make contact with each supplier to determine their interest and feasibility in this sourcing project. Ask:

Does this supplier have what it takes to be part of the existing supply base?

Can they provide the necessary service and quantity responsibilities?

Note: Source One is able to obtain price concessions that are not available to the public due to its relationship with over 6,000 suppliers.  By building strong relationships with suppliers of targeted services, Source One is able to simplify spending data-reducing the amount and type of spending categories that must be tracked.

5. The ABC's of RFPs: The Golden Rule? Open communication is key (and ultimately saves you money) throughout the Request for Proposals (RFP) process.

Suppliers may have questions about the RFP content and the document itself. Address these questions so suppliers can successfully respond to the RFP. Consider scheduling a time to review the document with each supplier.

It is crucial to sell to the supplier. Promote why this business is appealing and beneficial. The more reasons there are, the more adamant suppliers will be in trying to secure the business.

6. Stick to the facts: Turn to a fact-based objective market picture and plan from there.  Often times at the start of a project, Source One finds that companies are being over-billed. Due to lack of controls, decentralized offices or lack of resources, countless organizations have no knowledge of what contracts are currently signed, implemented or up for renewal. Therefore, one of the first steps Source One takes is to conduct an audit of the agreement to make sure their client is being billed properly.

The best strategy in nearly all negotiations with suppliers is to trim down or get rid of all emotion. Using market research to create a sound business case to the supplier will drive the supplier to make a competitive bid. From both a qualitative and quantitative aspect, gauge each supplier proposal against your internal benchmark.

7. Only fools rush in. Negotiating issues carefully saves money: From both a qualitative and quantitative aspect, gauge each supplier proposal against your internal benchmark.

The best strategy in nearly all negotiations with suppliers is to trim down or get rid of all emotion. Using market research to create a sound business case to the supplier will drive the supplier to make a competitive bid.

8. Planning and implementing = Results in action.

Apply the plan of action with suppliers. Implementing change management control is vital in rolling out the results of the sourcing process. Successful change management will guarantee a smooth transaction into the recommended actions, remove encumbrances to new processes and optimize the project results. Implementation should not conclude the strategic sourcing process. Put into practice performance metrics to assure the positive results of the initiative.

9. Continuous performance management will ensure you savings (and keep your suppliers on their toes.) 

Strategic Sourcing companies like Source One expose billing and service mistakes, allowing them to retrieve credits or refunds due to clients. As an additional benefit, Source One provides analytics on supplier performance to guarantee continued improvement.

Here are three crucial questions to analyze your current purchasing situation:

Are you being billed correctly by suppliers?

Is there better pricing available?

Are you getting what you are paying for?

10. Watching your back keeps you moving forward. Take a careful look at what your competitors are doing in terms of source and supply.Review market conditions to establish the possibility of a sourcing initiative.

Natural disasters and other recent market events that cause supply disturbances may obstruct the efforts of domestic and global sourcing.

Currency fluctuations will affect whether or not offshore sourcing is an attractive option.

Look at what competitors are doing in terms of price and supply. Are they searching for price relief or locking up supply?

New technology, regulations or policies can also change the marketplace. Look at what's happening right now!

About Source One Management Services, LLC

Source One is the leading Procurement Service Provider in the mid-market.  Source One has been providing on-demand resources for their clients for over 15 years. Engagements may include strategic sourcing, spend analysis, spend management, assistance with statements of work, identification of alternate suppliers, market and supply research, RFP management, price and terms negotiations, and contract recommendations. Source One also owns and operates the free procurement tool website, www.WhyAbe.com, which provides free RFX and Reverse Auction Tools, Contract Management, and Stores for suppliers.  In order to best service their clients, Source One provides flexible fee options for their consulting services. Clients can choose betweencontingency (gain sharing) based, fee for service or a hybrid. For more information, visit www.SourceOneInc.com or call 215-902-0200.