Lloyds TSB, procurement targets and supplier reduction programmes

Lloyds TSB – the UK’s largest retail bank -  recently announced major jobs losses and a profit improvement programme, including this.

We will optimise our demand management, simplify specifications and further strengthen our supplier relationships, reducing the number of suppliers to the group from around 17,000 to under 10,000, and further focusing on a core group of lead suppliers, to achieve approximately a 15% saving on addressable spend," the bank said.

According to the Robert Peston at the BBC,

“Lloyds currently employs 112,000 - and by the time the existing and new job reduction programmes are finished, the numbers employed will have dropped to less than 90,000”.

So that’s a staff reduction of around 20%. Which puts the announced procurement savings target (15%)  into perspective. It’s the same argument we made when Government was talking about procurement savings – if you’re reducing the number of staff, then you would expect a high proportion of procurement costs to come down automatically, even if you took no additional actions.

They may not come down proportionally - you don’t save much on energy if there are 20% fewer staff in a particular office. But you can in time reduce the number of offices... and stationery, desktop IT, travel, catering subsidy, payroll processing, company cars are all examples of categories that are strongly linked with staff numbers. So the procurement target of 15% over 3 years strikes me as pretty cautious.

In terms of the supplier reduction target, Mike Whitby (the new CPO) and his team are smart enough to know that this will not in itself deliver major cost reduction.  But it is something that looks good in the press release and everyone can understand it - I’m sure there’s a lot more going on at Lloyds than simple hacking of supplier numbers.  My suspicion from what I know of the industry* is that there will be major savings from some more aggressive harmonising of specifications across the Group, some good demand management opportunities, as well as more strategic commercial approaches with major suppliers. And yes, I would expect supplier numbers to come down.

Where quoting numbers like this can go wrong is when procurement resort to simplistic ways of reducing suppliers because they’re committed to a public target. The classic is using a Prime Contractor. Now this can be a good strategy, but too often it is done unthinkingly just so procurement or the organisation can make the supplier reduction claim.

“We’ve appointed a master vendor for temporary staff / construction / IT services – every supplier in that category will now work through them”.  I’ve seen that happen a lot, and while it can work well, it can also lead to additional margins in the supply chain, inefficient processes and hassle for internal users, and loss of key relationships with suppliers who turn out to be more strategic than you thought!

I’m sure Whitby and co are well aware of this, and I wish them success with their programme – and I’m sure they can over-deliver on that savings target.  As a shareholder and account holder with Lloyds for 35 years (and my parents before me with the TSB), I will watch their progress with interest.

(* I was CPO at NatWest Bank from 1997-2000 before Fred Goodwin got his hands on us...)

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Voices (4)

  1. Huhh?:

    I worked at Santander before Horta moved to Lloyds. They had a ruthless focus on procurement as a lever to reduce the cost:income ratio. It felt uncomfortable (as a major budget holder) to work within, as every spend decision was questioned and prodded and poked – but it did make you always consider what you were spending and where. So I have a strong hunch that Lloyds will achieve its ambitions.

  2. PlanBee:

    Another good example of setting a target and then people being a slave to it is in the case of eAuctions. A number of large organisations, including Financial Services, have a target of putting (say) £1bn through eAuctions. That then becomes the focus rather than running GOOD eAuctions.

    I have seen these poorly run eAuctions from the sales side, where the structure of the event placed no competitive pressure on my company and so we didnt bid hard. Oh and then they changed the specifications of the requirements after the auction anyway. Twice.

    However they did move £100m closer to their eAuction target

  3. Rob:

    “…reducing the number of suppliers to the group from around 17,000 to under 10,000, and further focusing on a core group of lead suppliers, to achieve approximately a 15% saving…”

    Quite a lot of guessing in here with “around”, “under” and “approximately”. And somewhere between 10-20% so let’s say “15%”.

    This is Lloyds, isn’t it? In Financial Services?

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