Prioritising Long-Term Strategic Value over Short-Term Savings

This guest post comes to us from David Yin, Associate Consultant at procurement consulting provider, GEP.

3G Capital, the distinguished private equity firm notable for its major acquisitions of Anheuser-Busch Inbev, Restaurant Brands (Burger King, Tim Hortons, Popeyes), and Kraft Heinz, is a leading proponent of aggressive cost-cutting strategies, relentlessly scrutinising the budgets of its portfolio companies to deliver returns to its shareholders. At Kraft Heinz, this meant an increase in its margins of nearly 60 percent in under two years’ time. For the slow-moving food manufacturing industry and its razor-thin margins, this was completely unheard of and celebrated as an industry milestone. Predictably, the success of 3G’s cost-cutting measures has not gone unnoticed, and organisations large and small are now using their example of radical cost cutting as the standard for effective business strategy.

In this scenario, it is often up to the procurement professionals within these organisations to step up to the task of finding the slivers of fat to shave off their bottom lines. This often means taking a hard stance against current suppliers by pressuring them to reduce costs, or replacing their suppliers altogether with those who can promise greater savings. However, this obsession toward obtaining greater savings in the short term often comes at the greater expense of strategic partnerships between the organisation and its suppliers. In their pursuit of pounds and pence, many organisations are alienating their core suppliers, burning bridges for future collaboration and restricting their abilities to facilitate alternative means of value delivery.

So how can you, as a procurement professional, create sustainable partnerships with your suppliers to ensure mutually beneficial growth and value creation?

  1. Open Communication
    Be open and frank with your suppliers; the more you try to sugarcoat existing issues, or turn a blind eye toward quality and service errors, the more you facilitate a culture of inadequacy. Create regular forums and avenues for conversations. Hold your suppliers to the same standards that you would expect of yourself, point out key issues and areas of improvement, but make sure to have open conversations about how you can both work together to resolve these issues.
  2. Idea Generation
    Once you have set up regular meetings and conversations with your suppliers, begin to explore new ideas with them. Suppliers usually have a better understanding of the industries in which they operate than you as a buyer. Often, your suppliers will have industry- and category-specific innovations, technologies and proof of concepts in mind that you could not even imagine. Leverage your suppliers’ knowledge and expertise, and work together with them to identify how best to turn their ideas into realistic methods and mechanisms with which you can create value for your combined businesses.
  3. Performance Evaluation
    The common disconnect between suppliers’ performance and buyers’ expectations is caused by a lack of tangible performance metrics against which suppliers can be measured. Establishing a well-defined Service-Level Agreement (SLA) with measurable Key Performance Indicators (KPIs) will go a long way in bridging the gap between expectation and reality, and provide early indicators for potential issues to be resolved before they get out of hand.
  4. Create Recognition
    Many companies often forget to, or do not feel the need to, recognise suppliers for their valuable contributions and outstanding performance. Just as you should let your suppliers know when they are making mistakes, you should also acknowledge their performance excellence or value delivery. Bigger corporations are beginning to hold annual supplier awards conferences, but it can often be as simple as having a conversation with them every so often to voice your appreciation of their work.

We are already beginning to see the limitations on 3G’s cost-slashing tactics. After its honeymoon growth period, Kraft Heinz has seen a reduction in its gross profits of more than 3 percent over the past year. Many industry analysts doubt the long-term sustainability of the company’s aggressive methods, and do not foresee a concrete path towards future growth aside from further M&A activity. While this is not solely due to Kraft Heinz’s approach toward procurement and supplier relations, companies seeking to emulate the 3G model will surely run into persistent issues in these areas if not dealt with appropriately, and with a long-term value creation objective in mind.

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