Cost cutting measures are on the agenda, but may prove risky

The latest Office for National Statistics figures released today which show that the UK economy has shrunk might suggest that firms need to cut costs as they try to weather the economic storm. This idea is given credence by a major study into the procurement strategies of organisations which found three quarters doing exactly that. However another study suggests that we may be approaching the point at which further cost-cutting measures will destabilise supply chains, making price reductions counter productive and exposing buyers to a greater degree of risk.  

Cutting costs was in the top three priorities for 76 per cent of buyers according to the “2013 Procurement Pulse” study, conducted by Science Warehouse, with reducing supply risk chosen by 40 per cent of respondents. taking a more strategic approach was identified by 36 per cent of respondents.

These findings form a sharp contrast to a new report from supply chain consultants Crimson & Co, which warns that supply chains need to be more “dynamic” in 2013 and should focus on risk management. Richard Powell, managing director at Crimson & Co said: “The economic climate has continued to drive an emphasis on price reduction from suppliers to an extreme. The result has been that relationships are confrontational and actually work against collaboration rather than towards co-operation.”

The survey suggests that buyers’ continued focus on cost reduction as well as the weak European economy will mean smaller European companies will start to look to deal in markets outside Europe. This will also present new challenges, as supply chains adapt from being relatively local to international. Risk management will be a bigger factor for companies than in 2012 as natural disasters have left businesses cautious, with supply chain professionals more actively exploring different sourcing options.

Powell added: “Against this cost cutting background, businesses are still being asked to respond to the ever-increasing pace of innovation. Innovation is vital for sales, and businesses are trying to find ways to manage the complexity this creates.”

He highlighted four impacts for supply chains in 2013; currency challenges; commodity fluctuations; political instability and the likelihood of natural disasters. He recommended businesses put risk management higher up the agenda, tailor supply chains to customer demands to boost competition and take a more holistic view of the supply chain rather than simply focusing on purchasing costs.