Question of the week; should cost reduction be the CPO’s top priority?

Afeter a week off for good behaviour, our question of the week returns.  And yes, this is pretty much the question we will be debating tonight at 5.30 in our first Spend Matters Sourcing Debate, in the Old Bank of England public house in Fleet Street, old London Town.

(We have a pretty full house;  but if you have a burning desire to come and haven't signed up so far, drop me a text today on 07717 734601 and we'll try and fit you in).

Back to the QOTW; is cost reduction always right at the heart of what we do as a profession? Is it the basic raison d'etre for us wherever we work? Or are other goals and drivers more important? Innovation? Risk?

I don't want to pre-empt the debate; but what do you think? We'll report on the debate of course but we're interested in your views if you can't make it, or indeed if you do attend and want to expand on whatever gets discussed tonight.

Voices (4)

  1. MarketDojo:

    In very simplistic (& capitalistic) terms, a successful company is all about making profit. To make more profit per sale, you either reduce costs or increase prices. Increasing the price may cause the sale to fall apart as you get gazumped by competitors (unless you are fortunate enough to have none or to have collaborated with them, tut tut) . Therefore reducing costs is the remaining path to keep successful.

    If your company sells it’s widgets in the market for £10 each and it costs them £9 to make, you get £1 profit per widget.

    If you carry out a cost reduction activity and manage to reduce the cost of your widget to £8, a near-as-dammit 10% cost reduction, your profit is £2 per widget sold, a massive 100% increase in profit per widget sold. In order to make £2 profit without the cost reduction, you would have to sell two widgets, in other words DOUBLE your sales volumes. Clearly cost reduction is hugely important.

    Yes this is very simplistic and doesn’t account for innovation, market S-curves, upselling, power of a brand, USPs and so on, but if I were a CPO, I would be keeping a very close eye on costs as they will account for greater profit by a factor more than growth of sales.

  2. Tom Lawrence:

    It depends what stage of maturity the function is at. If historically the function has been performing badly, then there is likely to be a lot of low hanging fruit, and cost reduction may be the priority.

    However, a high performing function should be in cost management mode, not cost reduction. And their top priority should not be focusing on the supplier market, but focusing inwardly at the organisation to challenge and change people’s behaviour. Too many stakeholders (often including the Board) need educating about what procurement is there for and what value it can bring. Until they understand this a large effort is required to educate them.

  3. Guy:

    Whether or not it should be, it more than often is

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