Cost-cutting measures at the expense of strategic goals

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containing risk.gifHow informed is your organisation about supply chain risks?

Why should Procurement professionals only implement cost-cutting measures once they fully understand the ‘big picture’ aspects associated with supply chain risks?

This is the third article in SmartProcurement’s World-Class Procurement Practice series, penned by Ronald Mlalazi (MCIPS), Commerce Edge Academy’s Edu cation Manager. This month's article is based on CIPS Level 5, Unit 2, ‘Risk Management and Supply Chain Vulnability’. The series is based on Chartered Institute of Purchasing & Supply (CIPS) unit content and on recent research done by Commerce Edge Academy.

Ronald M_Studio_Photo_100709.JPGRecent research has highlighted that Procurement professionals and business executives are obsessed with cost-cutting measures at the expense of effectively analysing potential supply chain disruptions, owed to the economic recession.

The continued existence of an organisation is determined by its level of sustainable profitability: the lower the costs of doing business, the higher the potential for profitability. However, the same cannot be said for sustainability.

Cost cutting can yield immediate profit results, but if implemented at the expense of risk management, it might be a short lived catastrophe. A corporate growth strategy entails three aspects: integration strategies, diversification strategies, and aggressive strategies (such as market penetration or product innovation and development), which demand that an organisation be more innovative in product development. Where the supply chain function is not keeping abreast with supply market developments, a gap will slow down product development.

Successful organisations are those whose procurement functions’ objectives are aligned to strategic corporate goals and promote adequate representation and early involvement of supply chain input in all the aspects of the business. Risk lies everywhere within the supply chain.

Procurement professionals need to know and understand the organisation’s corporate strategic goals and the direction in which it is heading, as this is the base on which Procurement’s strategic objectives must be built.

Guiding corporate strategic goals include building strategic corporate relationships with key stakeholders such as suppliers.

A holistic example of procurement embracing corporate strategy would be presented as follows: “The corporate objective is a cost reduction programme. In order for the supply chain to achieve the goal it might, among other things, introduce supply rationalisation, standardisation and e-procurement.”

Risk needs to be identified, analyzed and managed. Therefore, managing risk is one of the key challenges for supply chain managers. It is true that certain risk aspects within the supply chain cannot be eliminated; hence supply chain professionals need to have the ability not only to identify and analyze, but also to classify accordingly in order to have appropriate mitigatory strategies. Risks elements need to be eliminated, others minimized, yet others shared or insured, with others being accepted and budgeted for. Having classified risks in different categories, appropriate strategies must then be developed.

Purchasing risks can be classified into two major categories:

• Supplier failure to supply.
• The company’s purchasing policies.

Where supply chain management is not given adequate attention and supplier management policies are not well defined, an organisation will be heavily exposed to ‘wrong’ suppliers finding their way onto the approved suppliers’ database. The potential would also exist for the organisation to adopt a single sourcing strategy with limited knowledge of the supply market.

In order for the organisations to reduce the risks associated with the supply chains, there is a need to have a supply chain re-think. Effective supply market strategies are based on analysis, weighing up probabilities, defining strategies and planning their implementation in detail.

Some of the critical shifts in focus are:

• Move away from ‘silo’ functions to ‘holistic’ cross-functional processes.
• Increase knowledge of the supply market. Limited knowledge breeds ‘reactive attitudes’.
• Involve suppliers and buyers early in product development.
• Avoid viewing supplier relationships as transactional, but rather as collaborative.

Supply chain managers can assess the vulnerability of their supply chain to purchasing problems by using the following checklist:

Suppliers
Are your critical suppliers within your country of operations?
Are your ‘category A’ supplies from a single source?
Do your suppliers have a clearly defined corporate social responsibility programme?

Inventory management policy
What inventory policy do you use?
How was such a policy derived?

Conflict of interests
Does the company have a clearly defined procurement code of ethics?

Supplier assessment
Is there a formal method of assessing and appraising suppliers?
Is there a system of managing out suppliers?

Supplier development programmes
Is there a defined supplier development programme?

Cost-reduction initiatives
Do suppliers have any cost cutting programmes? How do these impact on quality and service delivery?
Is your organisation part of the supplier’s cost reduction programmes? If yes, at what stage is the involvement?

Supply continuity
Can the supplies be guaranteed despite disasters?

Supply chain risks have rocketed during the world economic meltdown, says Supply Management. Recessionary tactics, including hammering suppliers and cutting corners, have created a frightening list of concerns such as collapsed suppliers, fallen product standards and failed deliveries.

In order to achieve corporate goals, supply chain management is an integral part of business success. The following are aspects supply chain managers must be aware of to contribute to profitability:

• Understand the outcomes of a successful risk management process.
• Identify and understand the sources of strategic, operational and project based supply risks.
• Understand the impact of corporate risk strategy on supply chain management.
• Understand how and when to share risk throughout the supply chain.
• Understand the importance of supplier selection and appraisal.
• Understand how to control risks.
• Understand the costs and impact of changing suppliers.
• Understand the importance of corporate social responsibility and how it can impact on the continuity of supply.
• Understand the level of preparedness, in the event of calamities.

The level of success or failure of Procurement to achieve its goals is determined by how well Procurement professionals understand their roles and their operating environment. To achieve a sustainable supply of materials and services, all risks associated with supply need to be identified, analyzed and managed with appropriate strategies.

To learn more about Commerce Edge Academy and CIPS Qualifications, please contact Ronald Mlalazi, Education Manager of Commerce Edge Academy at ronaldm@commerce-edge.com. www.commerce-edge.com

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