Recession Reaction: Best practices for buying in a recession
Top procurement pros in a variety of industries discuss the challenges and opportunities facing them today
By Purchasing Staff -- Purchasing, 4/30/2009 2:00:00 AM
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There are plenty of positive signs in the economy, including growing consumer confidence and an increase in the number of buyers telling Purchasing that they plan to write more purchase orders in the next three months. But, still, we're in a recession and have been for awhile. How have purchasing professionals been reacting? How should they react? And, do these times call for a radical change in practices? Here are examples of how some purchasing professionals are adjusting their strategies to the realities of today and the hope of tomorrow.
Finance
Put the pressure on business stakeholders
Laurie Manderbach joined Charlotte, N.C.-based financial services firm TIAA-CREF in November 2008 when the economy's slide became a nosedive. As the new vice president of strategic sourcing, she faced the task of realigning the procurement function—immediately.
Her first step: Figure out the categories to focus on. She chose consulting, travel, office products, telecom and even rent-occupancy and real estate because of their importance to the company and the amount of spend for each.
Then, she hired some new procurement staffers with the specific experience required to manage those spend areas.
That was just for starters. Next, she launched 16 cross-functional sourcing-project teams consisting of business-unit owners, sourcing staff and finance representatives. The teams all had the same goal: to review individual spend categories and identify savings opportunities.
But, it was the next step that held the key to her plan's success: She put the onus for achieving the savings goals on the business-unit executives, with senior-management backing. "They own the budget," Manderbach says. Sourcing staff would act as consultants and advise on the best strategies for capturing the savings the business-unit owners would identify. "Each category has its own savings levers," she says.
The strategy takes advantage of the fact that the weak economy motivates business-unit owners to manage cost structures more than they ever did before—and to value the expertise that sourcing experts bring to that effort.
Top executives at the company understand that too, and support purchasing's efforts. "The fact that CEO and management team takes the time to meet with us and go over the status of where we are with each of the teams is a clear indicator that they are supporting procurement," she says. "And once you figure out where you are spending the most money, it becomes about driving the behavior and change."
One other element of Manderbach's strategy has been a closer focus on supplier risk. "We've always had business-continuity plans, but the prospect of having big suppliers going out of business makes it important to think about and plan our contingencies," she says. "We're taking a much sharper focus and looking at our top suppliers to make sure we have a clear understanding of their financial situation as well as make sure we have a backup in place should they go out of business."
—Dave Hannon
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MORE ON BUYING IN A RECESSION For more information and best practices on buying in a recession go to Purchasing.com's special report available only online at Purchasing.com/Recession |
Electronics
Check your suppliers' health
"Let's face it, CPOs love a recession," says Korea-based LG Electronics Chief Procurement Officer Tom Linton. "I am the only executive of the company who has walked into a conference room with a smile on over the last several months," he jokes.
A recession, of course, means a buyer's market for many production materials so prices are low, which makes buyers smile. But, it's also cause for concern for buyers, who need to monitor financial health of key suppliers, says Linton.
Here are some of the things he and his team check to be sure their suppliers are healthy:
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Whether they are paying their own suppliers. If a supplier starts slowing down payments to its own suppliers that's a sign that the company is struggling.
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Focus on what suppliers are doing with their cash. "Tell me how much cash the supplier has and its current burn rate," he tells his staff. "I want to know if they have enough cash to weather a storm and if they're generating cash." He doesn't focus on a supplier's revenue growth or operating income, because, he says, they won't be good.
Linton says LG is working with some suppliers to keep them healthy. For instance, LG has a program under which it will loan suppliers money at no interest "if they are doing something critical for us."
But LG has also extended payment terms to suppliers. And, the company is asking more of its suppliers to manage its inventory. Vendor-managed inventory improves overall supply chain efficiency, he says.
—Jim Carbone
Industrial Products
Help your suppliers
The manager of general procurement at a tool factory, doesn't like surprises, at least with his supply chain. To avoid the ultimate surprise—bankruptcy of a key supplier—he and his team spend a great deal of effort keeping up to date on supplier financial health. "You have to be proactive, before things happen," he says. And sometimes, being proactive means helping suppliers weather financial storms.
But before you act, gather information, he advises.
He and his team do supplier solvency and viability reports, based on, among other things, supplier surveys, market chatter, financials, performance site visits and interviews with people knowledgeable about the supplier and the supplier's industry. He identifies risks and then assigns them a priority and a strategy to mitigate the risk.
If a supplier refuses to answer his survey on their financial performance, he automatically classifies them as "high risk."
He doesn't panic if he sees numbers or hears rumors that would indicate impending bankruptcy. Bankruptcy is certainly a data point, he says, but it's only one data point in supplier risk management. What you do will depend on how important the supplier is to you, he says. If the supplier is important, or, resourcing quickly is not possible, maybe you can help the company.
Though he always pushes for extended payment terms, he tries to get suppliers their cash quickly. He says he'll consider sending some of his own company's Lean or sourcing staff to work with the suppliers and help them improve their processes or leverage sourcing techniques. He might even offer alternative payment solutions.
—Paul E. Teague
Metals
Stick with the fundamentals—but push the envelope
While an economic crisis may draw more attention to how a company manages its supply base, purchasing professionals need to stay focused on the fundamentals—and the strategies and tactics they've developed and put in place.
So says Eric Sandford, director of purchasing and inventory management at OmniSource Southeast in Lyman, S.C. Sandford works in an industry—metal-scrap processing—that's been hard hit by the recession. Both output and productivity are down by about 50% from last year, he says.
He has formed a team with members from other areas of the company whom he is training to be buyers. Among the fundamentals: He is consolidating the company's buying, mainly of maintenance, repair and operations (MRO) goods and services and putting in place agreements with preferred suppliers that cover 26 sites in five states—Tennessee, Virginia, North and South Carolina and Georgia. "You don't reduce the supply base simply for the sake of doing it," he says. "It has to lead to lower costs, improved quality and delivery. It is not easy to do."
The buyers have entered into contracts with a preferred supplier for certain categories of goods and services—industrial supplies, power transmission products, fasteners, uniforms—and have set up vendor-managed inventory programs with the suppliers. The suppliers work closely with user groups within the company, holding meetings on safety issues, and introducing new technology such as the latest in protection gear.
Another fundamental: The team has stepped up monitoring of supplier capability and financial viability. "During these times, there's no question purchasing has to be particularly vigilant of suppliers and their financial merits," he says. "We all know there are losses. Who will be left holding the bag? It will be purchasing and the leadership will be saying, what are you doing and why are we dealing with these guys who are on the brink?"
Sandford and his team are also actively involved in benchmarking activities. "It is a very important tactic in these times to get out there and revisit the marketplace," he says. "Get out there and push the envelope."
—Susan Avery
Consumer Products
Get Lean
Since joining HPI in November 2008, Michael B. Carr has been implementing a two-pronged strategy for working through a recession: Control inventory, and control—as much as possible—commodities costs.
At Homecare Products in Algona, Wash., where he is vice president of operations and where he supervises purchasing, inventory, engineering and quality, he is instituting programs to reduce the company's inventory of aluminum, particularly. He has implemented kanban programs that will emphasize automatic replenishment of direct materials for the company's portable and modular ramps. He is also taking steps to reduce the supply base.
Under his direction, the purchasing group—which consists of a master scheduler, two buyers and an inventory specialist—is implementing a two-week rotation of materials from receipt to final use. "Applying Lean principles will pay big dividends," he says.
Beyond inventory control, Carr is closely monitoring aluminum prices. "We're getting price quotes, which has not been done for many years," he says.
—Tom Stundza
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