Can closer attention by Small Medium Enterprises to Procurement as a strategic component work the competitiveness magic?
Australia Pty Ltd has a high cost manufacturing base. Globally only Norway pays higher salaries to its workforce than Australia does. Is this a nice to be or to have and is it something to boast about? Maybe yes, if its citizens can enjoy the comfortable or affluent lifestyle salaries allow. Maybe no, if it means that it may becoming less and less competitive than lower cost (esp.) SE Asia region and as the result is losing work to there, inevitably leading to higher unemployment and potentially cessation of business altogether. The demise of the Australian car industry, with the knock on effect with the support industries and also less and less exploration and drilling dollars currently being spent by the major resources organisations in Australia at present is testament to that.
Whereas Australia has been finding it increasingly challenging to retain and maintain existing business levels (manufacturing plus resources supply) other recognised high cost countries e.g. Netherlands, Switzerland, Germany, Scandinavia don’t do too badly in terms of retaining and maintaining a real economy. Accepted that the recent depreciation of the Australian dollar may inject some competitiveness in the short term however currency movement cannot be relied upon solely to protect business going forward.
So what could these high cost countries be doing better? More effective control or management of their holistic procurement operations? Having travelled extensively throughout Europe in the past and dealt with many organisations in all listed countries or regions I would suggest that they indeed pay real attention to Procurement as recognition.
Does Procurement require to pull a trick?
A company’s purchases can amount to anything between 40% – 70% of its annual revenue dependent on the nature of its business, what it provides and to whom. Irrespective of position within that bandwidth it still represents one huge area of business that can certainly influence the extent of profitability, or lack of, ifapathy or ignorance mean it is not being properly managed. If you are the CEO or Managing Director, or company owner even that’s reading this blog, do you actually know how much your annual purchasing bill is and how this stacks up against total company revenue? If it’s not your CEO or MD that’s reading this, ask him or her, preferably by email or in private so as you may not embarrass them in public and you get fired and it’s all my fault!
At a couple of seminars recently I listened to various, mainly SME organisations presenting how they managed their business operations and how they would do it over the next short/medium period of time to grow and remain healthy. Supply chains were referenced however no further detail, apart possibly from applying increased pressure on their own suppliers to reduce costs. Was that the only weapon in their armoury? One company’s MD referred to its programme of investing in graduate engineer recruitment and development to maintain a healthy flow of new blood and ideas to sustain ongoing expansion. I asked him (in private) did he, or would he also recruit procurement graduates. He replied it was something he hadn’t thought of or considered. That would have me think Procurement may not figure all that highly in his (or possibly most of the other attending organisations’) greater scheme of things. Would that mean therefore that the majority of these organisations might not have the level or extent of procurement capability that could save them a load more dollars rather than what returns they are currently enjoying (or suffering)?
So what rabbits can Procurement pull from the hat?
By investing a dollar and using it to fund or develop a professionally managed procurement function and in the process, transforming yourexisting one can produce ROI of ten dollars. Good business. Nice trick!
Use those dollars either to invest in new or additional plant and equipment to increase production output whilst maintaining the same overheads or lower production and selling costs, thus increasing profitability and better compete, without requiring bank or investment loans. Or use it to negate any need to lay off a much valued workforce that at some point you might require to rehire however you’ve lost them forever. Imagine the kudos you would enjoy within your local and wider communities if you did this. Nicer trick!
If you are (say) a $20 million procurement spend organisation that is supporting a $40 million revenue, assuming $0.50: $1.00 spend/revenue ratio. If you can shave $0.01 from the $0.50 start point, would equate to $400K saving, in turn adding 1% to net profit…and so on. Up to 5% I would surmise could be quite easy to achieve. How many more $$ millions would Sales require to win to provide similar return?
That’s one helluva trick!
