Navigating the Global Financial Crisis: What's Your Bailout?

Over the past two months, we have seen unprecedented shifts in the world economy. Faced with tightening finances, deflation and increased supply chain risk, businesses ranging from industrial manufacturing to high technology must find ways to ensure their financial health and, ultimately, their survival.

As the global financial crisis continues, executives are being asked what their bailout strategy is. And for an increasing number, the answer is spend management – the discipline of controlling and optimising the yield of every penny that you spend. Leading companies have come to view spend management as a key stimulus package for holding down costs and improving performance – critical imperatives in today’s down economy.

With high volatility running rampant in core commodities, many organisations – including nearly half of the FTSE 200 – are driving cost reduction rapidly through their organisation leveraging technology-based solutions that enable them to holistically source, contract, procure, pay, manage, and analyse their spend and supplier relationships. And there is ample opportunity for those who haven’t yet embraced spend management to do the same. Consider the following:

• Declining global demand for virtually all metal components has resulted in lighter order books and open capacity at many global metal component suppliers. Ever-changing export duties/taxes/tariffs and shifting global currencies have also created regional opportunities to source metal components from regions that have been less active in previous months. Buyers of metal components from all global regions have been able to identify savings opportunities related to declining raw material costs and hungry global suppliers.
• With oil plummeting to less than US$60/barrel, downstream commodity plastics have dropped precipitously. Polyethylene is down more than 25%, and polypropylene has fallen about 40% in the last six months. As demand struggles, these prices could very well drop even further. Export markets have cooled off and plastic producers are throttling back production to reduce oversupply. Plastic and rubber converters have even more excess capacity, and with raw material pressures easing, this is perhaps the most favourable sourcing environment for plastic and rubber parts in the last few years. Now is a great time to recalibrate pricing in just about any energy or petrochemical-based market. Buyers should be seeking frequent (monthly) price adjustment clauses to remain as consistent as possible with these rapidly falling markets.
• In March of this year, the unemployment rate went above 5% for the first time in over two years. Since then, the rate has steadily increased and is now at 6.5%. When the unemployment rate exceeds 6% companies can typically realise significant savings when sourcing temp labour services. High unemployment rates create a downward pricing pressure on pay rates in the labour market and the high demand for jobs makes the recruiting efforts easier.
• Lower labour rates will impact a number of indirect spend categories. Within the services categories, buyers will be able to take advantage of compressed labour rates in categories such as janitorial services, security guards, call centres, and business consulting, where the labour component is a primary cost driver, typically accounting for 40-50% of overall cost.
• In difficult financial times when capital is hard to come by, companies are holding off on purchasing new equipment. Equipment suppliers are desperately seeking markets for their products, and with raw material prices dropping, buyers are firmly in control in price negotiations.
• Every major transportation mode has excess capacity. International air freight volumes have declined for four consecutive months, rail and inter-modal traffic has declined 8% in September versus last year, truckload volume have declined for three consecutive months, and bulk ocean freight rates have dropped more than 50% from highs reached in May and June of last year. Historically, buyers have avoided transportation contract negotiations during the fourth quarter to allow the holiday surges to work their way through the market – but not this year. We are seeing healthy competition in every mode of transportation due to excess market capacity.

How Can Your Organisation Convert Opportunities into Bottom-line Results?

Target new spend categories

Set your sights on these and other categories – including many of the ‘sacred cows’ such as legal and advertising – which were once outside the realm of standardised sourcing and compliance procedures.

Don’t underestimate the challenge of data

As the saying goes: ‘garbage in, garbage out’. Invest in tools that enable you to cleanse, analyse and clearly view your spend across categories, divisions and geographies so that you can identify opportunities for savings.

Remove the mavericks

Use the current economic crisis to secure C-level support for policies and procedures to drive internal compliance with existing supply agreements. Also take the opportunity to secure budget to invest in cost containment solutions, such as contract management software, to ensure that vendor agreements are negotiated and finalised according to company policy and then implemented and complied with quickly.

Work with your suppliers

In a tumultuous economy, it is more important than ever for buyers and suppliers to work more closely together, share the economic burden of the times, and embrace innovative ways to ensure their mutual health. As the gap between low-quality and high-quality borrowers grows, more suppliers will experience cash flow problems. For forward-looking buyers willing to come to the rescue of their most important suppliers, third-party supply chain financing options exist today that enable buyers to hold onto their cash and suppliers to be paid early at far more competitive rates than traditional factoring or card providers allow. Buyers can use their good credit rating to help suppliers borrow at lower rates than they could achieve on their own. The result is a healthier and more productive relationship and supply chain.

Don’t be afraid to get help

Faced with pressures to deliver more savings faster than ever before, many companies are now looking outside for spend management process support, spend category expertise, or just additional arms and legs to help execute their savings plans. To meet budget constraints, many enterprises are revisiting variable or performance-based agreements that allow them to pay for all or a portion of these outside services based upon savings achieved.

Given the economic headwinds that all companies are facing, now more than ever is the time for spend management. Simply put, spend management is the fastest, most efficient way to create measurable, sustainable, bottom-line results. Control costs for direct materials where you can and press hard on your indirect spend. In doing so, you’ll create additional value for your organisation during these lean times and position it well for growth when things recover.