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Procurement / Business Strategy Strategy for creating a World-Class Procurement Organisation, Integration with Business Strategy and Planning.. Ability to influence the organisation's overall strategy. Selling the Procurement Business Case

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Old 05-08-2007, 02:41 AM
Supply Chain Guru
Join Date: Oct 2005
Posts: 42
David is on a distinguished road
Default Fewer than 10% of companies are meeting their own targets.

Buoyant market conditions and the pressure to focus on revenue growth has left many companies less disciplined in cost cutting, and ripe for private equity takeover, according to a report in The Australian Financial Review.

The report, by KPMG, said that fewer than 10% of companies that are doing cost reduction programs are meeting their own targets. Four out of five of the 427 companies surveyed saw the opportunity to reduce their cost structures, but only 8% achieved or exceeded their targets.

The survey found companies are resistant to substantial and fundamental change, like moving operations off-shore. The companies operating in industries where conditions are tougher – like media, insurance and telcos – find that their costs are under control, but resources companies are expanding so quickly that commodity prices are covering the increased costs.

Companies’ cost strategies failing to achieve sustainable benefits

While today’s businesses are under constant pressure to reduce costs, nine out of 10 cost reduction programs fail to meet targets, leaving many companies missing significant opportunities to boost profits and create a competitive advantage, a KPMG report found today.

Further, the KPMG report Rethinking cost structures, found the average company aims to reduce costs by a modest two per cent per annum but only 59 percent of these expected savings are being achieved.

Reflecting on the struggle to generate significant and sustainable cost savings, said many companies often pick the easy option for cost initiatives rather than those that will yield the most savings.

“Cost reduction requires extraordinary focus, but in these buoyant times where profits and revenues are rising, many executives admit to taking their eye off the ball on cost.

“But cost discipline must be retained, especially in growth periods as that’s when there is time and space to create sustainable change.”

The report also found that many companies do not have a clear view of what drives costs with less than half the surveyed companies making costs and profitability of business units transparent across the enterprise.

“Companies need more insight into what drives cost in their business so cost cutting can be targeted in the right places.”

Responsibility for cost management also remains unclear with only 39 percent of surveyed executives believing all managers across the business had responsibility for cost management; while only 16 percent saying it was the responsibility of everyone across the organisation.

“Companies achieving a cost advantage often have embedded a cost discipline into the culture, where every single person has a role to play; and cost reduction initiatives are strongly backed from the very top.”

The report further suggests achieving deeper savings requires companies to understand the link between their cost structure and the wider business; while being prepared to adopt major changes to their business model in order to remain competitive.

But the report found one of the biggest hurdles in achieving a cost-efficient business is the need for a cross-organisational approach, which often requires making difficult strategic choices.

This could include removing whole layers of the organisation or supply chain, rethinking customer interfaces, using information technology as an enabler; and as appropriate, embracing outsourcing, shared services centres and offshoring.

The report highlights five critical success factors for cost reduction initiatives which include:

Senior sponsorship – sponsorship and involvement from the very top to drive cultural change
Fresh thinking – backed with fact-based, rigorous assessment of savings opportunities
Consistent process and ruthless execution
Transparency and benefits tracking –measurement and monitoring of results
Organisational alignment – alignment of goals, measures and incentives.

“It’s time for management to take stronger action, company executives flying economy instead of business class is simply not enough.

“The current emphasis is on incremental improvement rather than change. To achieve real, sustainable cost reductions that provide a competitive advantage, the focus must be on fundamental change.

“But this isn’t something that can be achieved overnight. It requires clear leadership and communication from management and support from the very top to change practices that will deliver long-term benefits.”

Any comments?
David van der Walt

Last edited by David : 05-08-2007 at 03:22 AM. Reason: More info
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Old 05-29-2007, 06:30 AM
Procurementtips Member
Join Date: May 2007
Posts: 3
mariusb2 is on a distinguished road
Default Re: Fewer than 10% of companies are meeting their own targets.

yep all true.

In my (humble) opinion most companies are blundering into cost reductions without proper information to make such decisions. I think that over the last 10 years most companies have gone "lean" to such an extent that they do not have the organisational capacity to drive cost reduction programmes.

No richness in young ambitious people, no business intelligence IT components in place to adequately baseline caost and manage improvement programs from the baseline.

The overall motivation seems to be this year's executive bonus, rather than what is good for a sustainable business.
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Old 05-29-2007, 07:50 AM
Supply Chain Guru
Join Date: Oct 2005
Posts: 42
David is on a distinguished road
Default Re: Fewer than 10% of companies are meeting their own targets.

Hi Marius

Any thoughts / suggestions on how business should address this issue and how procurement professionals can influence their organisations to steer them in the right direction?
David van der Walt
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