Guest view: Recession or not, apply best practices for sourcing

There have been a number of signals lately to indicate the US economy may be slowing or heading toward a recession, they include:

  • The U.S. yield curve recently inverted for the first time since 2006. That move is historically a signal of recession ahead, according to data from Credit Suisse.
  • The Fed left interest rates unchanged after its recent meeting, but released new forecasts showing no more interest rate hikes this year, down from a prior forecast for two more increases.
  • There are also concerns about Europe’s economic health, highlighted recently when disappointing German manufacturing data suggested China’s weakness could be hitting Europe’s biggest economy more than expected.
  • The U.S. is nearing the longest economic expansion in its history, which lasted from March 1991 to March 2001, a total of 120 months followed by the dot-com bust.

There are some analysts who believe a debate can be had on the near-term possibility of a recession. Regardless of the economic signals, or which side of the debate you are on, good procurement and strategic sourcing practices always prevail. They can be used in both good times and bad to ensure your company is well-positioned to compete and prosper in any environment.

In its simplest form, strategic sourcing is the cross-functional team-based process associated with evaluating, analyzing, negotiating, contracting and selecting the best value supply solution (innovation, price, quality, delivery, service, etc.) for any given category of products and/or services.

When economic times are good, companies sometimes take their eyes off the ball, and do not focus as much on supplier spending activities. With healthy margins, companies tend to concentrate on growing revenue, while capital costs and operating expenses can take a back seat.

When economic times are bad, companies typically focus increased efforts on cost cutting. However, while achieving supply and sourcing efficiencies can be accomplished, negotiating cost reductions in a slowing economy can be more challenging.

Given all of the above, here are some of the key best practices that should be part of your company’s ongoing regular business activities, during economic expansions or contractions.

Conduct a savings opportunity assessment for your top suppliers and/or spend categories annually. Ask questions about each supplier, such as: When was the last time we competitively bid this product or service? How difficult would it be to switch suppliers? What other changes are occurring in this marketplace? Is the spend with this supplier growing or shrinking? How many suppliers are competing in this space? Then rank the opportunities accordingly.

Determine the sourcing approach for suppliers or spending categories that you have identified as opportunities for savings improvement. The approach will be different depending on factors such as the size of the spend, the number of competitors in the marketplace, and the complexity or proprietary nature of the supplier’s product. Some categories of spend require a lengthy competitive RFP and sourcing approach, while others involve shorter discussions.

Initiate the sourcing process by developing sourcing plans for each identified category or supplier opportunity. This plan should include timelines, prioritized savings estimates, resources assigned to each supplier or category, and strategies for competitive RFP development and direct negotiations. Supply markets change constantly. You should always be looking for new entrants with improved product and service offerings. Additionally, existing suppliers can help identify efficiency and savings opportunities.

Automate transactional and tactical procurement activities as much as possible so that you can focus more of your procurement resources on strategic sourcing activities. Procure-to-pay tools should be evaluated regularly and implemented as appropriate to ensure you are taking advantage of tools that can best automate and streamline your operations.

Regardless of whether we are headed for a recession, your company is always operating in a competitive environment, and should follow strategic sourcing best practices on a consistent and regular basis. This will better position your company to improve its margins and profitability, regardless of what’s going on in the economy.

Mike Cargiulo, founder and CEO of MJC Sourcing, based in the Lehigh Valley.

Mike Cargiulo is founder and CEO of MJC Sourcing, based in the Lehigh Valley. He can be reached at mike_cargiulo@mjcsourcing.com.

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