Unlocking the power of procurement in high growth companies
High growth industries and profit opportunities…
Whilst organisations around the world continue to trade in an environment of economic, political and consumer driven uncertainty, specific industry sectors have been enjoying high growth with big opportunities for further expansion in 2018.
Construction companies have been recording excellent growth and continue to thrive. With the UK Government committed to building over 1 million new homes by 2020, growth of 23% is being predicted by the Construction Products Association. In the United States over 210,000 new jobs were created in the construction sector in 2017 with a huge number of new hires secured in the final quarter (source: U.S. Bureau of Labor Statistics).
Cybersecurity is another booming industry, with companies, governments, and individuals increasing spending to protect themselves online. According to Cybersecurity Ventures, global cybersecurity spending is expected to be more than $1 trillion between 2017 to 2021 — compared to a market of just $3.5 billion in 2004 — making it one of the fastest growing industries in the world.
Technology remains a strong growth industry with pundits suggesting it will continue to grow up to 30% quicker than the economy as a whole over the course of the next 5 years.
With the Trump Administration revising (or reversing) a number of recent regulations, Banks and other financial institutions in the United States are set to take advantage of reduced compliance and regulatory costs. The financial sector is subsequently predicted to be one of the top growth industries across America in 2018.
Meanwhile in the UK, advertising, driven by a revolution in digital technology, is predicted to enjoy it’s 9th successive year of expansion. Growth of 4.8% is forecast in 2018 in an industry now worth £19.8 billion.
Other fast growth areas include:
- the ‘green’ industry, driven by increasing consumer demand
- online gaming which has seen a revolution in digital channels for customers
- the provision of care for an aging population, which, according to the World Health Organisation will see 22% of the global population at over 60 years of age by 2050.
…but is procurement leveraging its full potential?
With expansion and healthy EBITDA numbers being delivered, many organisations have – very understandably – been focusing their strategic efforts on continued top line growth. But there are always additional opportunities at the bottom-line - and the subject of procurement excellence can get overlooked in executive boardrooms during times of expansion.
The consequences of this include:
- Internal procurement teams which are under resourced, overstretched and lacking the means to secure maximum value for money
- Strategic procurement opportunities and enhancements in supplier relationship management being missed due to internal teams (often highly experienced and mature in make-up) needing to devote time to the growth agenda – for example in supporting acquisitions
- Varying levels of procurement performance across different geographies and acquired companies
- Poor visibility of spend and growing complexity in spend data sources
- Procurement not being included in the transformation agenda
Unlocking the full benefits
There are huge opportunities to deliver additional enhancements in bottom line performance at times of growth.
A growing demand for effective spend analytics - making sense of spend data that sits across increasingly complex organisations, different operating companies, geographies and cultures - demonstrates both the challenge and opportunity in this area.
Global sourcing is another key area where procurement excellence can open up opportunities to create big financial savings, enhanced supplier relationships and better service provision.
Areas for short and mid-term focus
Some of the smartest high growth organisations have been focusing on delivering effective procurement transformation to ensure their future businesses are supported by more sophisticated, mature and ‘fit-for-purpose’ in-house functions.
In the shorter term, working in partnership with an external procurement specialist can pay significant dividends.
A commercial ‘gain share’ model, where an external partner basis all or part of their fee on a % of any procurement cost savings delivered, reduces risk whilst ensuring a growing rate of return over subsequent years. Some consultancies limit their gain share to the first 12 months of savings, meaning that 100% of recurring savings in years 2 and 3 go straight to the bottom-line.
In instances where a business is growing rapidly, reductions in unit prices mean that financial savings will begin to balloon (equally rapidly) as spend volumes rise.
Sophisticated procurement teams are also capitalising on a principle known as the ‘Value of Growth’.
The 'Value of Growth' principle
The ‘Value of Growth’ principle involves considering the impact of your projected business growth on your supplier’s fixed and variable costs.
Fixed costs like sales, administration, warehousing and indirect labour remain the same in total when output increases but reduce on a cost-per-unit basis. On the other hand, with variable costs such as energy, transportation, raw materials and direct labour, the total increases in line with volume growth, but stays constant on a cost per unit basis.
Although it’s unlikely you’ll know the precise split of your supplier’s fixed and variable costs, you can create a realistic business model based on published information including annual reports, company literature, industry analysis and blogs.
Your supplier contacts will also often provide you with useful insights that help to build a clearer picture of their cost structure. Remember that if a supplier needs to add plant or capacity to accommodate your growth, their cost base will change.
|Total Cost:||Unit Cost:|
• Stay the same in total when output increases...
• and reduce on a cost per unit basis
Fixed costs remain constant as volume increases...
|...but cost per unit reduces
• Total increases in line with volume growth...
• but on a cost per unit basis remains constant
|Variable costs rise in total...
|...but cost per unit is constant
By assessing the variable proportion of their total cost, (fixed%=100% - variable%), you can work out the value of your business growth, or the decrease in unit costs, to a supplier.
The higher the percentage of fixed costs, the greater the reduction in unit costs for an increase in volume. For a tougher negotiating position, you can quote marginal cost figures, or the percentage reduction in unit costs where you’re not subsidising competing customers.
If you choose to adopt a softer approach, then you might want to use average cost data instead.
Calculating the value of increasing the size of your business with top suppliers – normally 20% of suppliers will account for 80% of your costs – enables you to develop a proactive cost reduction programme with a strong negotiating platform for reducing prices.
It is a particularly effective approach when your account constitutes a significant proportion of your supplier’s business.
Points to consider
- Certain industries are set to enjoy high growth in 2018
- Procurement opportunities can be overlooked as top line numbers deliver healthy EBITDA
- There are excellent opportunities to deliver additional profits by focusing on procurement in the short term
- Implementing effective procurement transformation to support growth – now and in the future – is a key strategic area of focus for many of the most forward-thinking organisations