Cost cutting returns to No.1 priority for CPOs

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CostCutting.pngLast years’ top priority, elevating the role of procurement to a trusted advisor, pushed to second place, reports Supply Management.


Procurement departments are facing a challenge to balance cost reduction with the desire to become better strategic partners because operating budgets and staffing will increase only slightly this year, according to research.


The Hackett Group said its study, The CPO Agenda, found that increased business uncertainty and risk are driving a resurgence in cost reduction strategies.


According to the study, which surveyed procurement executives from nearly 180 large companies in the US and globally, reducing and avoiding acquisition costs was the highest ranking priority in 2016, cited by 85% of respondents.


Last year’s top priority, elevating the role of procurement to a trusted advisor, was pushed into second place, cited by 81% of people.


Other objectives for 2016 included increasing stakeholder satisfaction, reducing supply chain continuity risk and protecting the company’s brand.


The research also identified gaps in four of the key procurement strategy areas: becoming a better strategic partner to the business, increasing spend influence, improving agility and tapping supplier innovation.


The report said even though they were rated as highly important by survey respondents, some procurement organisations had little ability to address them, making them critical targets for capability development.


The majority of respondents named predictive analytics or forecasting when asked to identify the trend with the greatest potential impact on procurement over the next decade. Next was cloud computing, followed by integration of a millennial workforce into procurement activities.


The research recommended procurement organisations become more information-driven and harness the value of big data. More than half of the study respondents lacked a formal market intelligence programme or were only in the earliest stages of adoption.


The study also said procurement organisations should focus more on tail spend – the 20% of spend that is spread across up to 80% of suppliers – to find cost savings, as this was a neglected area.


The report estimated that less mature sourcing organisations could save 3-5% by identifying maverick spending, while more advanced organisations could save 1-3%.


Chris Sawchuk, global procurement advisory practice leader at Hackett, said pressure to reduce costs in 2016 was increasing as companies expected a combination of greater uncertainty and a drive to grow revenue.


“At the same time, procurement leaders need to balance this with other more strategic priorities, like becoming a better strategic business partner,” he said. “This is challenging because for 2016 procurement operating budgets are expected to increase by just 1.1%, and staffing will grow by only 2.2%. So procurement can afford to fund only its highest-priority initiatives.”


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