The Fiscal Cliff: Three Reasons Sourcing and Procurement Should Care

Later today, we'll offer up our contrarian perspective on why the Fiscal Cliff could be a positive for the US economy in the not-so-distant-future. That is, if we go over it – or at least take similar severe measures to cut spending, raise revenue and pay down the debt. But more on that later. Perhaps more important for less philosophically or argumentatively inclined readers (bring on the rotten tomatoes, commenters!!) is why the Fiscal Cliff matters for procurement and why procurement organizations should prioritize the topic for discussion and analysis.

Procurement organizations should take a number of actions given the overhang of Fiscal Cliff and the uncertainty surround tax policy, demand (especially public sector) and related factors. First off, it's essential to not confuse a period of reduced demand (necessarily) with a period of declining commodity prices. A combination of global demand (India, China, etc.), speculation, scarcity, protectionism and continued unfriendly US policy toward domestic energy and mining portend continued commodity volatility for metals, agricultural products, and energy.

Given this, we see the best option as taking risk off the table. If you have a "no-hedge" policy going into 2013, reevaluate why. And if you're certain or fairly certain about demand, do something about it. Take commodity – and currency, depending on your sourcing strategies – risk off the table.

Second, start thinking about strategies that can create greater flexibility around working capital, inventories and the like. And don't lock yourself into any one "position." For example, where possible (MRO, perhaps), it is likely worth the added cost to work with a supplier on a vendor managed inventory perspective because of the flexibility it affords and the working capital it can free up from eliminating inventory on the balance sheet to extending absolute payment as long as possible.

But stay flexible and avoid longer-term arrangements if possible (e.g., fixed payment terms or discount schedules, such as those required when you push spend to a p-card). Given the potential profitability of putting one's balance sheet to work with early payment discounts – which, thanks to Oxygen Finance and KPMG, can now be reclassified as an income in certain geographies – it will pay to be flexible, especially as the cost of capital increases for suppliers and banks demand more onerous terms.

For example, in today's environment, it is all but impossible for a small supplier to get a line of credit without a personal guarantee unless they have had a banking relationship for years. This supplier is more likely in an austerity or Fiscal Cliff scenario where securing a load proves even more difficult to pay a premium for early payment options. And all the better as the buying organization if you can reclassify savings as income, especially when "normal" top line growth is more challenging than ever.

Third, in an environment where growth is declining (and hence, budgets as well) due to increased taxes and reduced deficit spending, consider the need to have more granular purchasing controls than ever before. Invest in the right T&E and travel system, for example, that enables smarter buying (e.g., using a discounted hotel site if it saves money over a contracted rate). Make sure your eProcurement system is rolled out across as many categories and users as possible to enable tighter controls. And make sure your employees aren't gaming services and other contracts through PO nonsense (e.g., issuing multiple POs just under a certain scrutiny threshold and/or without outcomes and payment tied to measurable deliverables).

Here at Spend Matters, we hope that our government uses the Fiscal Cliff to get its shaky financial house in order. But regardless of how selfish and nonsensical our politicians become over the issue, we in procurement can use Fiscal Cliff to shore up our purchasing visibility and controls while taking as much risk as possible off the table – not to mention enabling flexibility to take advantage of new opportunities as they present themselves.

- Jason Busch and Lisa Reisman

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