Strategies to stretch your budget so you can buy more for less

1. Trends in Sourcing and Procurement
By Greg Stoller
2008
Published: June 2008

2. 1
© Auxis, 2008 All Rights
Reserved
With many of the world economic indicators when and where those orders are relatively
“bearish” in the short term, and inflation on profitable for the supplier.
the rise, companies face increasing prices
for goods and services. While some Efficient Energy Utilization
companies will reduce discretionary
As the cost of energy in all forms rises, those
spending, others will look for ways to stretch
companies consuming energy most efficiently will
their budgets through savvy sourcing
perform better, all things being equal. For heavy
techniques, turning economic “lemons” into
energy consumers, the savings and cost avoidance
“lemon-aid”.
benefits can exceed seven digits annually.
Optimizing Performance During a Even though more efficient energy consuming
Recession equipment has a high purchase and set up cost, the
total cost of ownership can pay off in only a few
Peak sourcing and procurement
years. And it’s not only the additional cost over the
performance is always important to
less efficient energy appliances that is equalized, but
corporate objectives. During a recession,
the entire CAPEX cost can be recouped in many
achieving this goal can mean the
cases.
difference between emerging from the
recession successfully and not emerging at These demand benefit CAPEX costs should not
all. When revenues are down, cost overshadow the benefits of supply side opportunities
containment will help ease the strain, and such as negotiating lower energy rates or even
strong sourcing and procurement practices physical and/or financial hedging. Moreover, the
will make cost containment possible. supply side opportunities require little or no CAPEX
compared to demand side appliance retrofits.
Sourcing and procurement departments
“live and die” by the strength of their Mitigating Price Risk and Volatility
supplier relationships. These relationships
have a direct impact on a business’ The commodity and currency markets are causing a
profitability, providing favorable or lot of “sleepless nights.” Not only does a weak dollar
unfavorable pricing, as well as continuity of mean added cost for imports, but price pressures on
supply. A strong relationship with a supplier commodity based products also lead to higher
will bring “win/win” solutions during adverse domestic product costs.
economic times, due in part to a long-term
Some companies are implementing currency and
relationship mindset. Strong relationships
commodity hedging strategies. These strategies will
ensure continuous product flow at the best
bring predictability to product costing and avoid cost
cost. By comparison, a more transactional
volatility risk. As an example, consider a US company
relationship typically results in a “win/lose”
importing goods from China where the US dollar is
situation.
getting weaker. As time passes under these
It’s a “win” for the supplier and a “lose” for circumstances, it takes more and more US dollars to
the buyer when the supplier works to pay for the imports. With a currency hedge, the
maximize its profits and fulfill orders only amount of money required to satisfy the exchange
becomes fixed, adding budget and product cost
predictability.

3. 2
© Auxis, 2008 All Rights
Reserved
Low Cost Country Sourcing in the opportunities outside of, but closer to the
Short and Long Term domestic border compared to say a US
company sourcing from Asia.
Pressure to offer to customers products at
the lowest retail prices has forced Near Shoring offers advantages in addition
companies to look for a lower cost supply of to those mentioned above including skilled
goods outside of the domestic market. labor at a lower cost than the US,
Developing countries such as China, India, government support, geographic proximity,
and Africa offer low cost solutions. These more English speakers, more similarities to
“producing” economies, in some cases, are the US culture, and similar time zone daily
growing even in the face of recession in operating hours, just to name a few. These
many parts of the world. Purchasing in these advantages aid in control by facilitating
low costs countries is not without Economic, visits to the point of operation.
Social, Geopolitical, Technological, and/or
While the potential cost reduction may not
Environmental Risk.
be as large as Asia or other low cost country
As these low cost country economies flourish sourcing alternatives, some of the common
and create wealth, the amount of low cost country sourcing risks can be
discretionary income will increase. Over mitigated or even eliminated, thereby
time, the trade pendulum swings and a strengthening the chances for success.
country that was a “producing” country
Direct Buying and Selling
becomes a “consuming” country.
Companies that recognize this will plan for For various reasons, businesses purchase
the future and establish sales operations in and sell goods or services indirectly through
these countries now in advance of the intermediary companies. These
development of this sales market. They do intermediaries add value, but over time their
so when it is easier and less costly to build a customers may be able to work through a
sales presence and capitalize on “first direct relationship. In addition to offering
mover” advantages. cost savings, these direct relationships
shorten supply chain lead times, and
Near Shoring
troubleshooting response times.
Low cost country sourcing is not without risks.
When buying directly from the
Some of those risks include slower customer
manufacturer, it is possible to gain control,
service response time, loss of general and/or
lower the mark up paid, and eliminate the
quality control, poor handling of data,
overhead formerly paid to the intermediary.
language barriers, and excessive logistics/
warehousing/tariff costs. As a result, some
companies are implementing “Near
Shoring” strategies. Near Shoring exploits

4. 3
© Auxis, 2008 All Rights
Reserved
When able to sell directly to the end can grow exponentially. Technologies
customer, a similar cost reduction takes include e-procurement, reverse auctions,
place. It becomes possible to lower the spend analytics and business warehousing,
sales price and make the product more performance management, and others.
affordable to a larger market.
Whereas acquiring and implementing some
Sometimes there are greater logistics and of these technology tools was once cost
warehousing costs, so the entire cost of prohibitive for small businesses, the cost has
delivery must be measured before making greatly decreased, making many of these
any decisions. options now affordable to the smaller
enterprise.
Outsourcing Procurement for
Non-Core Activities These tools help in analysis, goal setting and
performance measuring; all of which are
When a company evaluates its expenditures critical to reducing costs.
and procurement activities, there are
diminishing returns to managing every direct Overall Trends
and indirect spend category.
In a challenged economy where corporate
When the indirect spend products and sales revenues fall, more pressure is placed
services do not warrant a dedicated on sourcing and procurement to keep costs
internal procurement resource, some in check. This forces sourcing and
companies choose to outsource the procurement to go beyond the
procurement of these categories. This is one conventional cost saving methods in order
reason why procurement consortiums have to respond to competitive cost pressures.
come about.
Eventually, sourcing and procurement
The outsourcing solution is also a scalable departments will reach a point when
approach. When a temporary need for “bullying” suppliers to hold or lower prices
added resources arises, the outsourced no longer works. Anticipating this,
company fills the need without necessarily companies need to explore technology
having to grow its procurement tools, more closely manage demand, check
department. their indirect expenditures for efficiency and
value, utilize financial tools, re-examine and
Mixing Purchasing and be critical of their chosen supply markets
Technology for Superior Results and suppliers, and chase the right sourcing
and procurement opportunities in a
When a company operates a great
prioritized manner. By implementing these
purchasing department, they are capable
strategies, companies will maximize their
of great results. When Technology is added
sourcing and procurement performance in
to a great purchasing department, results
any economic environment.

5. Auxis is a leading Management
Consulting firm located in the Coral
Gables, Florida area. Auxis’ Supply
Chain Excellence Practice believes in
a practical, “back to basics”
approach to help our clients buy,
ship, and store right. Our
methodology is designed to provide
our clients with real-world business
solutions anchored by solid financial
analysis.
Auxis can help you to adapt your
supply chain for the benefit of your
customers, business partners, and
shareholders through service offerings
such as sourcing and procurement,
strategic evaluation, network design,
provider selection and deployment,
and IT supporting infrastructure,
selection, and deployment.
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