Due to inflation, labor shortages and supply chain woes, chief financial officers (CFOs) are grasping for strategies to enhance revenue and mitigate risks. Additionally, the stressful financial situation stemming from the pandemic is lingering longer than many expected. To mitigate this, CFOs are utilizing procurement best practices and strategies as a major lever for protecting profits and increasing margins.
Instead of viewing procurement as a back-office function, CFOs are embracing many of the same complex procurement strategies to make quick improvements in a portfolio company’s finances.
CFOs who work alongside their procurement officers can dramatically improve their profits and margins through procurement-related cost optimization, mitigate risk through supplier resiliency and achieve a competitive advantage in the marketplace.
From the beginning of the unprecedented problems caused by COVID-19, companies had to look for new avenues to drive savings. Procurement changes some of the fastest ways to improve cost efficiencies . Procurement and supply chain management can generate savings in months, as opposed to revenue growth, which can take years. When the pandemic hit, smart companies started using procurement as a lever almost immediately, while other organizations lagged in the beginning.
Prices on nearly all goods and services, from raw materials to labor and transportation services, are skyrocketing. In the wake of the COVID-19 pandemic, demand for goods have surged, and supply chains are currently strained like never before.
And while it’s recognized that it’s difficult to lower procurement costs at a time of raging inflation, CFOs are ensuring their company’s procurement strategies are not solely based on cost and price alone. Rather, using a Total Cost of Ownership (TCO) approach that includes utilizing demand and process levers, has proven to be an effective strategy to counter pricing increases and inflation growth.
As CFOs and procurement leaders are taking a more aggressive view of procurement’s ability to impact earnings and earnings per share (EPS) — below are examples of procurement’s TCO approach within an inflationary market:
Price– With inflation continuing, there’s less room to reduce the cost of goods and services. So, which pricing levers can help a company achieve the most value for its spend? A full competitive bid, incumbent renegotiations, extension of a current deal to avoid price increases, and protection from future price increases should all be part of one’s procurement toolkit.
Demand– How can an organization influence the demand or need for goods and services? Possibilities include stock keeping unit (SKU) rationalization, schedule optimization, complexity reduction, usage rationalization, item substitution or rationalization and demand reduction.
Process– How does a company procure goods or services in a way that maximizes value? Answering that question requires looking at parameters such as order size, compliance, and lifecycle cost management.
Beyond cutting costs, reducing demand, and changing processes, we’ve seen a major focus in the last 20 months on supplier continuity programs to mitigate supplier risk. If you can’t rely on key suppliers to fulfill orders for materials you need to make finished goods, you cannot drive revenue. When risk management begins in the sourcing stage through identifying and closely managing suppliers, threats can be identified early in the process.
To reduce risk, they need to broaden their supplier base by identifying new partners, including potential second- and third-tier suppliers. Other risk mitigation strategies include moving production to less expensive countries; relocating it to nearby companies to shorten the supply chain; and shifting to JIC (just-in-case) supply chains, which involves purchasing in greater volume to maintain extra inventory.
Do these procurement strategies work? The answer is yes.
A 1 percent decrease in spend will increase company profits by more than 1 percent, past experience shows. In most cases, a company’s procurement spend is many times its profit level, so a 10 percent reduction in spend may actually improve profits by 20 percent to 40 percent improvement. Compare those results to the $5 to $20 in new net sales companies need to generate a single dollar in profit impact. There are few savings levers that offer such a dramatic, immediate impact.
Significant cost savings through smart procurement strategies can change that – as can vastly improve procurement data collection and analysis, a weak point of many organizations. Savings that make a measurable difference to profitability achieve the financial predictability CFOs are looking for. Alignment between the procurement function and the CFO’s office can be a company’s greatest weapon in difficult financial times – and help leave competitors well behind – pandemic, or no pandemic.
If you are a business owner or CEO within the San Francisco Bay Area or Silicon Valley, in need of an experienced fractional CFO to help your company create new strategies to increase profits and profit margins, improve cash flow, and establish efficient accounting and billing processes, our highly skilled outsourced CFO services provide direct access to high-quality expertise in a cost-effective manner.