Procurement teams can leverage key tactics like contract renegotiation and vendor consolidation in categories like IT, professional services, and marketing to prepare for a recession caused by the coronavirus.
It’s all happening very fast, isn’t it?
My home state of Washington feels like America’s Ground Zero for the COVID-19 coronavirus outbreak. Most large employers have advised employees to temporarily work from home. The University of Washington has stopped in-person education. Roads are empty. There are no lines for lunch, dinner or happy hour at any of the popular downtown restaurants.
Health concerns aside for a moment, this looks like it might have some very serious economic implications…and businesses should be preparing right now for a coronavirus recession.
Procurement teams can expect to play a major role in reducing spend and providing the needed flexibility to help weather this storm. Here 5 Procurement Tactics to Prepare for a Coronavirus Recession.
Coronavirus Is Already Causing A Global Slowdown
China has already experienced damage to its global supply chains, reduced imports, and a dramatic reduction in tourism. Goldman Sachs estimates that key Chinese economic indicators—such as coal consumption, passenger volume, and property transactions—were down 70-80% from 2019 levels (recently rebounding somewhat to 60% below 2019 levels).
Additionally, Goldman Sachs calls out 5 ways coronavirus will continue to impact the global economy:
- The direct impact on China’s overall GDP and consumption
- The negative effect of reduced exports to China from other countries
- Reduced spending by Chinese tourists negatively impacting global travel and tourism
- Global supply chains are damaged due to reduced manufacturing capacity in China
- Disruptions to domestic economic activity (and consequently to international economic activity) in other virus-hit countries
And it looks to be getting worse…
- Oil prices dropped to $42 a barrel, representing the worst single-day drop since 2008.
- The New York Times highlighted the speed in which the global business outlook has moved from rosy in the last week of February to concerned in March.
- Goldman Sachs has already cut its forecast for global GDP and US GDP growth.
Though they don’t think we’re heading for an immediate recession, it looks like a slowdown with 0% global GDP growth is very possible (something that hasn’t happened since the Great Recession).
Procurement Teams Need to Prepare Right Now for a Recession
In 2019, Suplari surveyed procurement executives on top tactics to prepare for recession.
A majority felt a recession was imminent within 18 months, and we are tracking to their prediction.
41% of companies felt they were unprepared to deal with a recession (particularly smaller companies with immature – or nonexistent – procurement teams).
Asked about their biggest recession concerns, procurement executives said layoffs and budget cuts were top of mind – as was the need to drive fast savings while maintaining good relationships with key suppliers.
Smart procurement teams are working proactively with suppliers and the spend base to drive savings that can help avoid painful layoffs and budget cuts across the business.
Travel, facilities, office supplies, marketing, professional services, and IT are some of the top categories that get scrutinized in a recession. Proactive teams take the time to do a deep dive and build a category strategy for each one, so they are then prepared to find quick savings when asked to deliver.
Here are 5 Procurement Tactics to Reduce Spend Ahead of a Coronavirus Recession:
As the market turns quickly, proactive procurement teams can employ these 5 tactics to help manage and control spend amidst the turbulence.
- Contract Renegotiation: Identify contracts with both strategic and non-strategic suppliers where your company might have leverage to renegotiate on more favorable terms. Successful contract renegotiation requires rapid access to contract terms, contract renewal dates, spend analytics, and solid relationships with key budget owners who are motivated and ready to reduce spend and support savings goals.
- Vendor Consolidation: Vendor consolidation is the bread and butter savings tactic for sourcing and procurement teams. This requires solving the problem of overlapping suppliers providing your company with similar products or services. Procurement teams can reduce the number of suppliers providing a similar product by offering a single “preferred” supplier more volume in exchange for price concessions. Companies often can receive a 5-20% reduction in unit price in exchange for more volume and some preference or exclusivity in a category. Successful vendor consolidation requires good data, spend analytics, and reasonable categorization. Contract data in a consolidated contract management system is very helpful. Sourcing or category managers can then take this data and work with other leaders to make smart and effective vendor consolidation decisions that save money fast.
- Delay expenses / project expenditures: When there is business uncertainty, the easiest decision is to delay large expenses. To do this strategically and effectively, executives and procurement teams need clear visibility into spend trends, contract renewals, and open purchase order (PO) data. Good spend analytics highlight trends and show when large spikes occur from budget owners across the business. Contract lifecycle management reveals contracts coming up for renewal that can either be delayed or eliminated. Visibility into open purchase orders highlights committed spend by the business that can potentially be delayed or renegotiated. A good procurement analytics system helps drive faster and more-informed decision making from a detailed analysis of available spend, contract, and purchase order data.
- Avoid maverick and bypass spend: Maverick or bypass spend occurs when budget owners use a non-preferred supplier, instead of the preferred supplier with whom the business or procurement has negotiated favorable terms. Maverick spend with a non-preferred supplier usually results in a 5-20% higher price than the same purchase with a preferred supplier. Maverick spend generally happens due to a lack of visibility or any well-defined procurement processes. To avoid maverick spend, teams should have good spend analytics and categorization that highlights preferred supplier spend. Spend analytics allows the procurement team to then address the behavior with the budget owner. A good purchase order system will also drive better purchasing processes and improve controls on requisitions.
- Put more spend under management: Effective procurement teams manage most spend across their company to drive higher savings. Generally, procurement involvement is mandated in some areas of spend called “managed categories”, but other categories of spend are left to the business to manage. When businesses need to reduce spend and drive greater savings, the CFO can mandate procurement’s involvement in more sourcing events OR the procurement team can build relationships with the business to participate in more sourcing events. In both scenarios, procurement will need to quickly understand categories, spend, and contracts – and be prepared to negotiate effectively in conjunction with the finance and business teams.
Procurement Teams Save the Day
As the business environment begins to contract due to the coronavirus recession, procurement teams have an opportunity to save the day – delivering spend reductions that avoid painful layoffs and help their companies to weather the storm.
The coronavirus shows just how fast things can change in today’s global economy—
Is your company prepared for a recession? Procurement teams need clear spend visibility, contract analytics, category strategy, and solid relationships with their business partners to do their jobs effectively.
Suplari can help your team gain better spend visibility and locate cost and risk reduction opportunities that can make all the difference in times like these. See for yourself by scheduling a free demo today (http://suplari.com/demo).