When the Going Gets Tough…Where Do the Tough Go?

Yes, the tough get going. But where do they go? The current business environment is difficult to say the least. Companies are facing a combination of challenges that many of today's leaders have never experienced.

The recent U.S. debt debacle and subsequent downgrade by S&P was arguably the catalyst in a massive Wall Street sell off that brought the Dow Jones Industrial Average down more than 15% in just under 20 days. Massive stock sell offs typically signify a decrease in consumer confidence. No one knows exactly how consumers will react, but if history holds true, consumers are likely to become more frugal with their discretionary spending. Analyzing the chart below, each significant dip in consumer confidence shares timing with a drop in the overall stock market. This means that for most companies, the pie will shrink and their ability to feed the top line will be significantly challenged.

Conventional business wisdom says that when revenue's shrink, cut your cost to protect your margin. It's the basic yin yang philosophy of business. However, key input costs such as labor, commodities and logistics have risen substantially over the past year and indicators point to this trend continuing. A recent study by The Hackett Group found that companies expect the rate of inflation for commodities to rise by more than 30 percent during the next twelve months. Additionally, the labor costs of LCCS continue to rise annually 5%-15% as supply/demand imbalances perpetuate, unions continue to strengthen and local governments increase regulations on foreign companies. Furthermore, logistics and transportation costs have undergone double digit increases since 2006 due to oil price increases and container supply shortages.

Let's recap -- companies are now fighting for a larger piece of a smaller pie to maintain revenue targets. In tandem, companies are facing cost increases on nearly all inputs. So while many companies are trying to get "tough" and "get going," they frankly don't know where to go. For America's C-Suite, it must feel like a bad dream where the walls are closing in from all sides and there is no door. The situation is grim indeed and I don't have any optimistic platitudes to offer, but I don't believe the situation is hopeless. The most Darwinist companies will find new ways to rise to these challenges and remain profitable. Many of the above factors are uncontrollable. Markets will continue to ebb and flow and direct costs appear to be on the rise for the foreseeable future. Therefore, it's time to examine what factors we can control and look internally to maximize efficiency and effectiveness.

The truth is, there is an abundance of low hanging internal fruit in corporate America that has not yet been harvested. For example, I was recently on a benchmark and assessment engagement that outlined over $140mm in annual cost savings by simply nudging the needle towards world-class efficiency and effectiveness in internal processes. This represents a substantial decrease to their operating expenses and an improved bottom line. To navigate this new business environment, executives must take a similar look in the mirror and truly ask themselves, "Am I doing everything I can to maximize efficiency and effectiveness within my organization?" Hidden savings abound in areas such as supply chain, finance, IT and procurement and all of these areas offer potential cost savings. However, considering the audience, let's focus on some quick win areas for procurement that companies should be investigating:

Staffing: Do you have the right employees? Are you focused on the right initiatives? Are you at the right price and in the right quantity?

Sample benchmarks vs. world class

  • Direct and Indirect procurement costs as a percentage of spend
  • Percentage of total resources focused on non-strategic processes
  • Staff mix by employee stratification/band

Sourcing and Supplier Management: Do you understand the "five W's" around your spend, and are you using this information to be as cost effective and process efficient as possible?

Sample benchmarks vs. world class

  • Direct and Indirect cost reduction/avoidance savings as a percentage of total spend
  • Percentage of direct/indirect suppliers compared to world class
  • Sourcing execution cost as a % of spend
  • Percentage of spend influenced by procurement
  • Percentage of annual spend that is competitively bid
  • Ratio of maverick spend to total spend
  • Percentage of suppliers not meeting SLA's

Procurement Operations: Is your company optimizing all of the sub-processes within the P2P process?

Sample benchmarks vs. world class

  • Order cycle time
  • PO Processing cost as a percentage of total spend
  • Percentage of orders requiring post issuance attention
  • Percentage of late payments to suppliers
  • Percentage of "no touch" orders

The above is simply a sampling of the first step in a source to settle diagnostics. Once a company has identified how it compares to world-class organizations, it can begin to create a roadmap for improvement -- these improvement initiatives will always be a unique combination from company to company. A common theme remains: hidden cost savings opportunities are always uncovered and no company is doing everything perfectly. The ones that will succeed in this new business environment are the ones who aspire to be the companies looking for ways to continuously improve, regardless of what tomorrow brings. So, for those leaders out there who are looking to get "tough" and "get going," take a moment to reflect on whether your organization is "going" in the right direction.

-- Josh Peacher, Senior Consultant, Archstone Consulting - A Hackett Group Company

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