In Part 1 of this mini-series, I looked at how a declining economic environment in 2008 -- whether it takes the form of regular slowdown or a full-blown recession is somewhat irrelevant for these purposes -- should cause procurement organizations to seriously revisit their sourcing and re-sourcing strategies going into next year. In today's continuation of this series, I'll talk about how procurement organizations thinking about what a downturn could bring should already be giving serious consideration about helping their customers -- the business -- and even their own organization move from a fixed to a variable cost structure.
First, it's probably worth asking the question: Why would you ever want to consider reducing fixed costs in a down market? One reason is that in an economic downturn cash is king, and in this environment, the lower the fixed costs your organization has, the more nimble it can be in making business decisions and meeting earnings and other related expectations. Downturns can also serve as good times to get rid of artificially inflated fixed cost structures such as labor (union or otherwise protected) or previous fixed-cost contracts which were negotiated in a stronger economic climate.
Obviously, the specific strategies for moving to variable cost structures can vary greatly between industries and categories. For example, in the automotive or A&D industry, making the transition from fixed to variable structures can take the form of purchasing more assemblies and finished products and buying fewer parts and raw materials. In the high tech, electronics, and consumer goods industries, these types of analyses and actions often take the form of complex make versus buy analyses involving supply chain modeling and analysis on a global basis.
It's even possible to apply this type of framework and thinking to indirect and services spend by creating entirely new categories for procurement to own. In some cases, this might take the form of looking at areas such as helpdesks or customer support and moving to an outsourced model. Or it could take the form of shifting away from fixed maintenance and support contracts to variable ones (with caps) based on actual usage.
Outside of going after or creating new spend categories to source and manage, another way to help your organization drive to more of a variable cost structure is to outsource parts of the indirect procurement organization (or possibly even direct, but that's an entirely different subject). This could take the form of basic category outsourcing or hiring a partner to manage your entire procure-to-pay technology and team infrastructure. And a lot in between. Fortunately, although procurement outsourcing is somewhat of a nascent space, there are well over a dozen providers who are more than capable of bringing their experience and perspective to the table. Some are global. Some are local. But you can certainly learn a lot from talking to them. Even going through an RFP process can be a good exercise in thinking through how to best manage indirect and services procurement from a customer-centric perspective.