Kent Mahoney

10 November 2022
Topics in this article
  • Cost Optimization

Smart decisions made by businesses in the US will help them become recession ready.

Fear, nerves, anticipation – this is likely to be the language individuals and businesses are using when discussing today’s economic climate in the US and across the world. This is perhaps unsurprising as 91% of CEOs in the US are predicting a recession in the next 12 months, with the majority believing that it is going to be a long and difficult period for businesses and the economy.

As a result, there are going to be difficult conversations taking place in offices across the United States, whether it’s the 30th floor of a New York high rise or the board room of a manufacturer in Houston. A recession represents a make-or-break moment for businesses and survival now sits on top of the corporate agenda.

So, what can be done? And what actions can businesses take now to ensure they can weather the storm ahead?

Spend on productivity and growth

Research from Bain & Company conducted on businesses during downturns concluded that businesses that bought better in downturns recovered faster than their peers and enjoyed better long-term health. ‘Productivity spend’ refers to the recognition that the greatest productivity gains are to be found across the supplier base.

Productivity gains can be found by businesses through developing an in-depth understanding of the supply chain to identify opportunities to eliminate waste, adopt technology, and ultimately do things a little differently. It’s time for businesses to be bold in their spend and supplier management practices.

In the face of the storm, it’s also important that business leaders do not lose sight of the end goal: growth. Maintaining spend in areas that help businesses move beyond the downturn will determine the winners of the impending recession – i.e. those businesses that will find long-term success. The economic situation means that demand is low, but through protecting core supply relationships and staying front of mind with customers, businesses will be ready to scale more efficiently when the time comes.

Stop, assess, and make informed decisions

Managing through a downturn can be described in basic terms: sell more, reduce costs, or find a balance between the two. Selecting the strategy that is right for your business requires crystal clear organizational context. The questions that procurement leaders across the US should be asking are: what is the business value behind each new and current supplier relationship? How does each purchase order or contract contribute to the overall objectives of the firm? Why spend it now, like this, and how to gauge success?

However, these questions shouldn’t be contained to procurement team meetings or board rooms. It is important that a business becomes cost-conscious from top to bottom. It’s about encouraging careful thought when it comes to spending and building a cost management culture across the entirety of the organization.

Now is the time to look at spending through a new lens. Asking key questions across the following areas will set businesses up for long-term success.

  1. Risk and compliance: Is a supplier helping us to meet regulatory needs or provide prevention, protection, or remediation against certain risks that might impact our brand or ability to operate?
  2. Purpose: How can we avoid our purpose being the early casualty of the impending recession? Are there ways to spread costs while maintaining our commitments and impact?
  3. Revenue & Growth: How are we able spend strategically to ensure we are meeting current demand and are ready for an increase?
  4. Innovation: Where can we scale back and where to we need to commit to innovating across the business?
  5. Productivity: How is our spend enabling us to operate our business functions more efficiently in the face of economic challenges?

Cost optimization is real business value

For a function that has spent years trying to move away from being measured solely on savings, now is our opportunity to remind everyone that delivering real commercial value is still in our hands. More than ever, procurement thinking needs to be applied to every spending decision, but also every in-life contract and make vs buy consideration. A lot of businesses are already ahead of the curve, with cost committees in place and a line of business cases outlining more daring and structural cost optimization ideas.

This is going to provide CPOs all over the world with huge capacity and capability challenges when needing to do more, and more complex work at the same time. The best businesses in the next ten years will be those that optimized productivity, innovated, or grew their way out of this recession, all the time maintaining their focus on purpose and resilience.

CPO’s must be thinking about how to invest to save, a tough but timely business case to make.

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