Procurement Will Eat Itself (Part 1)

Jon Milton, Director at contingent labour supply management specialists, Comensura, looks at the 'cannibalisation' of procurement, and what that means for consumers. Tomorrow he continues with an example of a model that will counter the external threats to supply. 

The term ‘pop will eat itself’ was coined in the 1980s by the journalist David Quantick during an interview with the band Jamie Wednesday in the NME. Essentially the idea was that pop music was incapable of creating anything original and therefore had to cannibalise itself to generate new material.

Having recently reacquainted myself with this idea through the repeated barrage of the likes of Ed Sheeran on the radio (oh the joys of having children!), I started to wonder whether the same pattern was now spreading within procurement (specifically in relation to margin negotiation), what this meant and what the alternatives could be.

Clearly this all depends on the consumer and how cannibalisation impacts them. Pop music is throwaway with a limited shelf life, and its consumers are generally attracted to songs that they recognise in some format. People will therefore continue to buy pop music and its suppliers will continue to make it. For procurement however, the impacts are potentially very different and can have more concerning repercussions.

The key output of continually re-visiting margin reduction through successive procurements is that certain suppliers won’t want to play anymore, and choose to place their business elsewhere. The impact on the consumer is a shortage of supply and/or a compromise in quality, as the suppliers that are left in struggle to meet demand and/or have to reduce their costs to accommodate margin reductions and therefore dilute the service that they provide to maintain profitability - or ultimately, as in the case of Carillion, over-estimate profitability, become debt laden and don’t survive.

This situation is perhaps most apparent in the public sector, where authorities themselves are under enormous pressure to reduce costs. In the care market for example, there have been numerous examples of suppliers either withdrawing their supply or collapsing completely through changes in authority buying behaviours.

There is now a real need to develop supplier capacity in the face of continually increasing demand, in what is often referred as a market in crisis. This is one of the reasons why we set up our Younifi business last year, which is designed to help councils to re-engineer the care supply market to provide better outcomes for their citizens whilst spending within their budgetary capabilities.

In the agency staffing market, similar trends are developing. A number of the larger, national staffing companies have started to steadily withdraw their support for volume based-business (either where they act as the lead vendor or support another lead vendor) due to the margin returns and associated resource requirements.

This is entirely understandable given low unemployment rates and increasing demand from within the private sector, where the margins are considerably higher and there is consistent volume opportunity – even in the face of rampant competition. The impacts of not being able to get the right calibre of staff for the consumer within a local authority are however now being felt far more acutely, as their own permanent resource capacity is now stretched to the limit through successive redundancy exercises, so every contingent worker has to be able to hit the ground running and form a vital part of the total workforce.

So, the reality of ‘procurement eats itself’ is not a good thing for the consumer and therefore not for procurement itself. If procurement cannot deliver for its consumers, then what is its purpose?

We'll move onto that tomorrow.

First Voice

  1. Alan Haynes:

    The basic premise with this article is that it is procurement who continue to demand lower margins. In my extensive experience this has not always been the case. Ask any procurement practitioner how many times they have sent a contract award document through for approval only to be told to reduce the margins further – get a lower price. This has happened to me many many times. So to think that it is procurement who demands lower prices is not entirely accurate – procurement acts on behalf of companies/departments etc. Savings was an easy target in the early days (say 10-15 years ago) but with the more professional procurement function that operates today, value is the key driver not price. Procurement isn’t perfect, but is also isn’t as bad as it has been in the past.

    When considering articles of this nature we must also take into account the author and the vested interests that come with the authorship. Account must also be taken of geographic issues, as procurement in the UK, is entirely different to procurement in the US.

    All suppliers would probably love to see procurement “eat itself” – that way they would have free reign. I look forward to tomorrow’s edition!

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