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.

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.