Jaggaer: COVID-19 - How to preserve cash in times of crisis
Cash is king once again. When a crisis hits, every organization needs cash on hand to hedge against financial and economic uncertainty, address unexpected expenses, and keep the business running. It’s foundational to corporate survival.
The coronavirus outbreak is the latest ‘black swan’ event to highlight this lesson, which has been taught and re-taught many times before. There are several ways procurement leaders can optimize spend management and sourcing practices right now to handle ongoing pandemic impacts and position the business to navigate future shifts.
- Pinpoint where money is being spent.
Get real insight into the spend within each of your products and services. At the component level, what drives the price of the product? What impacts quality? What about its delivery? What drives suppliers’ costs and how does that impact overall spend on the product or service?
An intimate understanding of these costs and relationships helps teams manage spending more effectively. The visibility helps realign budgets to where spend is going, understand how much budget should be allocated to each category, and reconstruct the playing field as new spend categories arise. It’s also the first step to leveraging your buying power. If you uncover 50% of what you’re buying is based on one commodity, you can bring larger orders to fewer suppliers, and increase competition for your business, securing a better rate.
2. Rule out maverick spend and identify new savings opportunities.
There are quick ways to save everywhere in the purchasing value chain -- you just need to know where to look. Off-contract spend is the most urgent to address, especially in times of uncertainty, because it hurts supplier relationships, forfeits discounts from preferred suppliers, and wreaks havoc on a company’s bottom line. Maverick spend often occurs because employees don’t know a pre-negotiated price exists, or because procurement processes are too complex. Clearly communicate these relationships, enforce catalog shopping, and ensure people know where to go for negotiated pricing information.
Next, get creative and think beyond the status quo. Look at inventory. Are there items that won’t move, or have aged to the point they can’t be used? Can you sell these items elsewhere? What about pushing spend to virtual cards to control expenses, secure rebates, and reduce the risk of fraud? Thinking in this way delivers some of the biggest and most immediate savings impacts – and should be engrained into regular procurement activity, not just during a crisis.
3. Collaboratively renegotiate rates and contract details with vendors.
The only ‘bad’ question during a negotiation is the one that doesn’t get asked. A rule of thumb: everything has value in negotiations, and everything is negotiable. Figure out what matters most to the supplier – it’s not always price -- and use that insight to reach a win-win arrangement for both parties.
A supplier may give you a discount if it means they get paid earlier. Offering better managed inventory, reducing their risk of engagement with multi-year contracts, or promising deeper forecast visibility can all be enticing supplier incentives and strengthen long-term relationships with critical suppliers. Negotiations are critical to reaching liquidity goals, so come armed with data and a clear understanding of both your and your supplier’s position. And always keep it collaborative – while margin reduction mandates may provide some immediate relief, it’s a poor business practice that risks creating new problems down the road.
4. Always think about ‘what if’ and plan for the future -- the best you can.
The coronavirus pandemic is a reminder that we can’t always anticipate where disruptions will come from. Many supply chain risks hit suddenly and hard with little to no warning. Proactive ‘what if’ thinking is the best way to prepare for these surprises. That same thinking applies to savings.
Model various sourcing scenarios – across all different combinations of revenue, budget, spend, and more – and understand how those risk events would impact the P&L and suppliers. If you’re consuming the same material as bicycle manufacturers, and indoor bike sales are picking up, how does that impact your supply sources? Watch what’s going on in the world and consider how events could impact your business. With the economic volatility expected to last well into 2021, now is the time to understand your risk tolerance for future events.
Similarly, engage with your suppliers to find a solution. When sourcing strategic categories, focus on the outcome, not the path, and consider all options. When given the chance, most partners will put options on the table you weren’t even considering. The typical result is bottom-line gains for both parties.
Projecting and weighing different scenarios, approaches and outcomes is critical – for procurement, and in life. As a new grandfather, I was happy to share this lesson with my daughter as they navigate the many joys and challenges of new parenthood. As I shared, there are countless ways to do it right. There is never a single solution, despite what the experts say. You need to find the path that works best for you, your partner and loved ones. It’s just like building collaborate supplier relationships… okay, not exactly, but the lesson holds true.
Times of crisis bring many challenges, but also opportunity. As I tell the kids I coach, hard work pays off. Although the steps above may seem daunting, saving money now will put the business in a better position to navigate ongoing pandemic impacts and handle whatever future crisis awaits. We’re only in the second or third quarter of this pandemic. We have to stay in the moment and play the long game. It’s procurement’s time to shine and deliver.