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Cutting with care

When Royal Mail group procurement director Kath Harmeston approached the organisation’s 200 key suppliers to secure a 20 per cent cut in costs, it raised more than a few eyebrows. Seasoned procurement professionals know that simply demanding sweeping cuts from suppliers is unlikely to work, but Ms Harmeston’s strategy was more sophisticated than the press headlines suggested.

That was in late-2010, when Royal Mail was undergoing a major programme of modernisation, a new chief executive had been brought in to prepare it for a potential privatisation, and headcount and other costs were, in any case, already being cut. “The new chief executive had asked me to assist in the process of cost improvement for the business and the target was 20 per cent,” says Ms Harmeston.

The process – although no doubt challenging for suppliers – was nevertheless quite consensual. “I’m not a hatchet person at all; I’m more of a strategic player,” she says. She appealed to them to work with Royal Mail to come up with ways in which the figure could be achieved over the following six months.

“We asked them to submit proposals for each idea that they had. They had four weeks and we then activated an assessment approval mechanism internally for each and every idea that came in from our suppliers. We had a massive response. Our supply base worked with us very well and we had more than 500 proposals.”

Procurement might be involved in tendering and selecting suppliers but once the deal has been done they step aside

So many, indeed, that not only does Ms Harmeston suggest that all her financial objectives were met, but the organisation is still working through every cost-cutting idea today. The key to that success, she believes, is that the programme had the unequivocal support of the Royal Mail from its new chief executive down, but sought to work out with suppliers how the cost-cutting targets could be achieved. In other words, it was a two-way dialogue in which suppliers could potentially find some benefit too.

Royal Mail’s approach contrasts sharply with that of outsourcing giant Serco, whose chief financial officer Andrew Jenner sent letters to its 193 key suppliers demanding a 2.5 per cent rebate. When news of the squeeze became public, Serco was shamed into refunding the suppliers that had succumbed to the pressure. The strategy backfired dramatically.

These two episodes illustrate the pressure that all major organisations are under to cut costs and how suppliers often get caught in the line of fire. The trouble, says David Atkinson, founder of Four Pillars Consulting and former procurement director at aero-engine maker Rolls-Royce, is that imposing straightforward across-the-board cuts on suppliers rarely works.

What is required is a more analytical approach. “You have to analyse your spend,” says Mr Atkinson. “It seems obvious, but a lot of organisations have not got a grip on how their money is spent in their supply base. You have to segment that into categories, and prioritise in terms of the amount of money you are spending versus the complexity and maturity of the supply market. Then you have to develop procurement strategies accordingly.”

For example, if a particular supplier has a near-monopoly in one market, a heavy-handed approach could be positively damaging. The key is to develop a “shared manifesto” that can also benefit the supplier, perhaps enabling that business, likewise, to cut its costs.

However, procurement organisations can vary greatly in quality and sophistication, says Ed Cross, head of Xchanging Procurement Services. “Some businesses have done a fantastic job, particularly in the manufacturing sector and the automotive sector. But there are lots of other sectors, particularly in procurement for indirect goods and services, where it can be described as patchy, at best,” he says. In too many organisations, procurement is simply about “buying things”, he adds, rather than the strategic acquisition of key goods and services.

Furthermore, the best efforts of procurement can often be undermined by other departments. For example, a procurement department might establish a preferred supplier for a category of products or components, but staff often continue buying from their own preferred vendors, says Nick Wildgoose, global supply chain product manager at insurer Zurich. “One of the problems is that procurement might be involved in tendering and selecting suppliers, but once the deal has been done they step aside and no one monitors whether the money is being spent with the right suppliers or not,” he says.