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“Procurement can drive strategic business decisions”
Jamie Ogilvie-Smals
Hypothesis
2
• “Procurement can drive strategic business decisions”
- Cost strategy is a fundamental part of business strategy
- Procurement can deliver the cost strategy
- Delivering the cost strategy will positively impact the bottom line and
shareholder value
If organisations are not making use of Procurement effectively,
they are not maximising value for their shareholders
Business strategy
3
Michael Porter identified cost leadership strategy as a fundamental part of broad business strategy
What is Cost Leadership?
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Cost Leadership is based on being the lowest cost producer in an industry, for a certain quality of product
Improve process efficiencies
Gain unique access to a source of lower cost materials
Outsource and use lower cost alternatives for appropriate functions
Avoid certain costs altogether
5
Cost leadership strategy
Cost leadership examples
Companies focusing on cost are among the FTSE 100 risers this year
Cost leadership examples
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• CRH has successfully employed the principles of cost leadership as part of its strategy since 2007. Cumulative annualised gross savings of €2 billion implemented to 2011, of which €0.5 billion was realised in 2010
• Whitbread has a cost leadership strategy, focusing on relatively inexpensive food and hotel prices. They have championed the use of dedicated management teams to make operational and cost efficiencies, including through procurement
• Ryanair has a strategy based on cost leadership, which has helped the business make a profit of €503m in the past financial year. Cost reduction initiatives include eliminating the need for check in desks, cutting the weight of its aircraft, and investigating using larger aircraft doors to speed up boarding
Procurement can deliver the cost leadership strategy
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Procurement have the role and tools to deliver the strategy
Responsibilities Tools and skills
- Insource vs. outsource decisions- Management of external spend- Selecting appropriate suppliers- Supplier relationship
management- Reducing costs from 3rd parties
- Cost/benefit and cost/quality analysis
- Reviewing input vs. output costs
- Transparent and rigorous fact-based decision making
- Specification/demand challenge- Benchmarking and Negotiations- Focus on value rather than just
cost
Procurement activities shape the company direction
Procurement have the ability to deliver cost leadership
Procurement can deliver the strategy - examples
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• Research* has shown that- 3rd party spend represents 47% of revenue- Procurement are managing 83% of spend- Procurement are on average saving 5.3% of spend
- 2.5% cost reduction- 2.8% cost avoidance
• In a stagnant economy, cost reduction can be easier than revenue growth as a tool for margin improvement
• Procurement and finance are jointly setting up genuine savings tracking mechanisms that reflect the true position and have credibility
• 4C Client experience 2011/12 of 8% cost reduction savings
Procurement are playing a major part in managing external spend and delivering cost reductions in the current market
* 2012 CAPS research: Cross-industry report of standard benchmarks
Delivering the cost leadership strategy impacts shareholder value
9
• 4C research has shown that there is a strong correlation between margin and PE ratio (e.g. share price)
• Work which maintains or improves margin will therefore have a major positive impact on shareholder value
Ladbrokes
William Hill
Paddy Power
Margin is the critical measure for shareholder value
Conclusion
10
• “Procurement can drive strategic business decisions”
- Cost strategy is a fundamental part of business strategy
- Procurement can deliver the cost strategy
- Delivering the cost strategy will positively impact the bottom line and
shareholder value
If organisations are not making use of Procurement effectively,
they are not maximising value for their shareholders