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Doing Business in Britain: A culture of spending apathy?
A smarter spending report – challenging if supply chain failures are preventing growth of
British businesses in tough economic times
Contents
03 Executive summary04 Key findings
Smarter Spending for Business: 05 A lack of purchasing control06 The importance of regular supplier reviews07 UK businesses are focused on cost-cutting, not smarter spending08 The value-added benefits of the purchasing function
09 Conclusion10 About ERA
Expense Reduction Analysts Contents02
Executive summary
As the government continues on the path of austerity and makes further spending cuts (an extra £2.5 billion of cuts across departmental budgetsover the next two years), business leaders are under pressure more than ever to ensure survival by streamlining business costs.
The economic outlook for many UK businesses continues to look challenging. In his last Budget speech, George Osborne announced that the Office for Budget Responsibility (OBR) has cut growth forecasts from 1.2% to 0.6% and that borrowing remains static at £121bn.
The first report, The Psychology of Procurement, showed that at board-level many businesses had misunderstood the importance of strategic purchasing. Indeed, 71 percent of financial directors believed procurement was not viewed as a strategic function within their businesses.
Executive summary Expense Reduction Analysts 03
But, as recent supply chain scandals have amply demonstrated, this short-term, tactical approach to cost management can lead to supply chain failures and cause long-term damage to an organisation’s competitiveness, profitability and brand reputation.
This report seeks to discover the attitudes and practices of employees (from junior executives to directors) with purchasing responsibility and how they impact business operations. 516 business people – across a large range of industries including IT, retail, manufacturing, public sector and telecommunications – were interviewed for the survey.
The report asks:• Are supply chain processes being
effectively managed?• Do employees have the skills to identify
suppliers who suit the requirements of the company?
• Do internal departments collaborate to ensure consistent supplier relationships across the board?
• Are employees supported by the board with appropriate training?
• Do organisations form strategic relationships with key suppliers?
‘Doing Business in Britain: A culture of spending apathy?’ is the second research piece in the ongoing series of Smarter Spending reports.
Key findings
59%
The report found the following:• A culture of apathy towards purchasing.• A lack of purchasing control.• Minimal supply chain reviews.• Little value attributed to the purchasing
role – Employees devote little time, and have limited expertise for making key purchasing decisions caused by a lack of training.
• An inherent short-term cost-cutting approach – There is a lack of strategy applied to the purchasing process.
A ‘culture of apathy’Our last report, The Psychology of Procurement, showed that many CEOs and FDs only consider the short-term picture and default to a defensive cost-cutting mentality in business spending. In fact, 46% of the companies only discussed procurement at board level once a year or never.
Expense Reduction Analysts Key findings04
This ‘Doing Business in Britain: A culture of spending apathy?’ report found that this mindset has translated to frontline employees. Often more effective and sustainable purchasing strategies such as concentrating spend where it’s applicable – smarter spending – are either misunderstood or are incorrectly implemented by inexperienced employees.
Key among these supply chain failures across all the UK’s business sectors is the lack of purchasing control at mid-management level. Indeed, most middle management employees appear to treat purchasing with apathy at best. This coupled with a lack of board level oversight means businesses are leaving themselves wide open to making poor cost management decisions. A lack of purchasing management at a strategic level is preventing businesses from making the right supply chain decisions and inhibiting UK businesses ability to grow.
Most importantly, unnecessary and poorly implemented cost-cutting measures are compromising the quality of, and investment in, products and services and the inherent lack of control is leading to preventable supply chain disasters.
Many employees lack the direction or motivation to change the way they work. Also, they do not understand the importance of the purchasing function and their role within it. Indeed, many employees did not have the skills or desire to build effective relationships with suppliers and integrate the supply chain partnership into the business plan.
Overall, the report illustrates an ingrained apathy towards smarter spending among UK businesses, stemming from a legacy approach to managing supplier relationships and an unwillingness of staff to challenge the status quo.
This report highlights a number of clear supply chain issues for businesses across key industry sectors and how they impact organisational effectiveness, damage competitiveness and restrict growth.
will not review suppliers unless there is a problem
Definition of smarter spending‘A long-term business strategy that combineseffective cost control and supply chaindevelopment for innovation and investment.’
Smarter Spending for Business: A lack of purchasing control
A lack of accepted working practices and guidelines has, in most cases, led to no clearly defined purchasing policy. When a policy is in place it rarely filters down to middle management and so many purchasing decisions are made by employees without the experience, structure and skills to source the most suitable suppliers.
The survey found that 65 percent of junior management are able to make some or all purchasing decisions with no approval from senior employees or insight at board level – demonstrating a clear lack of control.
And less than half of all companies, 49 percent, have enterprise-wide purchasing processes indicating an alarming lack of company-wide supply chain control.
Furthermore, a third say there is no consolidation of suppliers across their organisation, and it’s very much down to the individual to make the decision about which supplier to use. This lack of co-ordinated control is likely to mean that any cost management gains will operate within silos.
And less than a quarter of businesses have an approved list of suppliers.
Nearly half of those surveyed, 49 percent, don’t know if their business has a purchasing process, have no process or are left to do their own thing when managing a supplier tender.
What processes are in place for managing a tender with existing or new suppliers?
A lack of purchasing control Expense Reduction Analysts 05
What are the approvals required for junior staff?
There is no consolidation of suppliers across the organisation as a whole
There is a significant absence of company-wide controls and processes as well as limited strategic thought towards purchasing. Nearly half of those surveyed don’t know if their business has a purchasing process, they have no process or are left to do their own thing when managing a supplier tender.
0% 10% 20% 30% 40% 50% 60% 70%
Anything over a certain spend level has to be authorised by
the directors
I can make some (up to a certain budget) or all decisions
without senior approval
35%
65%
35%
56%
49%
14%
31%
9%4%2%
We have standard processes that we all stick to Each person/department does its own thing There is no process, we have to generate a new one each time We use consultants to manage this process I don’t know what processes are in place 2%
Strongly agreeDisagreeDon’t know
49%
14%
31%
4%2%
35%
56%
9%
Smarter Spending for Business: The importance of regular supplier reviews
Without strategic relationships and regular checks, underlying issues can remain unsolved until it’s too late. Tied into a culture of purchasing apathy, this survey highlighted a reticence among organisations to regularly communicate and collaborate with their supply chain. In fact, over half primarily use an online search tool to source a new supplier and this task is often delegated to a junior member of staff. And worryingly, 59 percent of businesses will not review suppliers unless there is a problem.
However, there are some positives. 40 percent are starting to see the value in tendering and reviewing suppliers – these businesses are more forward thinking and likely to be better placed to survive tough economic conditions. Alarmingly though, 60 percent don’t.
How would you describe your relationship with your suppliers?
How do you monitor supplier performance?
Expense Reduction Analysts The importance of regular supplier reviews06
Through regular supplier reviews, companies can identify holes in the supply chain. However, 56 percent rarely speak with suppliers, don’t trust them or only speak with them if there is a problem. This clearly indicates there is no strategic relationship between suppliers and businesses. Relationships therefore are likely to be purely tactical with suppliers held at arm’s length.
0% 10% 20% 30% 40% 50%
3%
I meet regularly with all my suppliers and look for ways to improve the service or offering
I only speak with my suppliers when a problem arises
I don’t trust my suppliers; I have to keep a close eye on them
I rarely speak with them or am in contact with them
44%
37%
16%
0% 10% 20% 30% 40% 50% 60%
5%
1%
5%
3%
I conduct regular reviews to ensure suppliers keep to their commitments and prices
I tender every project to keep suppliers on their toes
As long as they provide a good service and the price is fair I am happy
I’ve had the same supplier for years and never had a reason to change
We use consultants to monitor our costs and controls
I don’t monitor supplier performance
32%
54%
0% 10% 20% 30% 40% 50%
3%
I meet regularly with all my suppliers and look for ways to improve the service or offering
I only speak with my suppliers when a problem arises
I don’t trust my suppliers; I have to keep a close eye on them
I rarely speak with them or am in contact with them
44%
37%
16%
0% 10% 20% 30% 40% 50% 60%
5%
1%
5%
3%
I conduct regular reviews to ensure suppliers keep to their commitments and prices
I tender every project to keep suppliers on their toes
As long as they provide a good service and the price is fair I am happy
I’ve had the same supplier for years and never had a reason to change
We use consultants to monitor our costs and controls
I don’t monitor supplier performance
32%
54%
What triggers a supplier or service review at your company?
Smarter Spending for Business: UK businesses are
focused on cost-cutting, not smarter spending
Cost cutting measures may keep businesses afloat temporarily, but checks aren’t being put in place and businesses are risking their long-term growth prospects.
A smarter spending strategy, combining effective cost control and development for innovation and investment is the only way businesses will be able to successfully ride the economic storm.
UK businesses are focused on cost-cutting, not smarter spending Expense Reduction Analysts 07
Organisations are thinking short-term instead of long-term. Many changes are reactionary rather than proactive. For instance, 60 percent of companies said a need to cut costs triggers a supplier review. And over 70 percent said a price increase or poor performance would be one of the things to trigger a change.
0% 10% 20% 30% 40% 50% 60% 70% 80%
Annual review
Contract expiration
Price increase
Poor service
Need to cut costs
Senior management
Business expansion
Down-sizing business
Industry regulations
Other
49%
62%
78%
80%
60%
18%
28%
15%
23%
2%
Smarter Spending for Business: A lack of value is attributed to the purchasing function
How do you benchmark your purchasing activity?
Purchasing very much comes as a secondary priority to their primary job role and therefore isn’t seen as important enough to warrant investment or training. However, with the correct training and more value placed on purchasing at board level, more employees would be able to build the skills to create and maintain effective relationships with suppliers to
help aid future growth.Nearly half say that they receive no reward for securing the best deal. However, if incentives were in place, employees would be more inclined get a better deal. Currently there is inherent lethargy towards proactive supplier relationship building because of the lack of value associated with it.
While 37 percent regularly monitor the market to secure best price, nearly half of respondents confessed they just use the previous price without any detailed analysis to benchmark suppliers, or don’t benchmark at all due to a lack of time. But a quarter of respondents say that if it were their own money, they would be far more careful with it!
Expense Reduction Analysts A lack of value is attributed to the purchasing function08
This report’s findings also demonstrated that there is a lack of value placed on the purchasing function.
Encouraging departmental collaboration would consolidate spending, focus on the best supplier relationships, create a more cohesive culture internally and change the existing attitude towards purchasing.
It is essential to ensure that all employees involved in the purchasing of goods and services are given sufficient support and training. 64 percent of sole purchasers said they had received no formal purchasing training. However, this research also shows that 63 percent said they did not want purchasing training despite the need, demonstrating that they don’t understand the benefits of purchasing training.
There is no reward or personal benefit to me for getting the best deal from our suppliers
Strongly agreeDisagreeDon’t know
49% 47%
4%
It’s also imperative that employees provide accurate measurements and detailed business intelligence to their FD, so they can provide strategic guidance to the board. However, if the internal attitude towards training remains the same, this is unlikely to happen. And companies will not reap the benefits of a long-term purchasing strategy.
I am sole decision maker but have had no formal purchasing training
Finally, the report found that 43 percent felt it would be impractical to be trained in multiple sectors which could suggest a need for sector specialist advise. Purchasers are forced to be generalists in the decisions they make, and therefore will struggle to hone job specific purchasing skills.
I purchase multiple areas it would be impractical to have training in every one
Strongly agreeDisagreeDon’t know
39%
43%
18%
Strongly agreeDisagreeDon’t know
0% 10% 20% 30% 40% 50%
2%
6%
46%
37%
9%
Other
I just look at what I have paid before
I monitor the market regularly and closely to know
I’m not able to benchmark as I don’t have the time
I use the previous price paid and services levels received
33% 64%
3%
Conclusion Expense Reduction Analysts 09
Conclusion
Purchasing roles are undervalued within businesses and those who have a purchasing responsibility as part of their job function see it very much as a low priority.
Senior decision makers are not investing in training employees and employees do not believe they need to be trained in purchasing.
There is a fundamental lack of awareness of the value of procurement. Often purchasing responsibility lies at the feet of junior members of staff regardless of experience or expertise.
A wholesale culture shift coupled with organisational change is required. More value must be attributed to smarter spending across the entire supply chain if businesses are to benefit from cost management. Only if these changes are made to culture, attitude and processes, will companies begin to see operational efficiencies and increased profitability. UK decision-makers in all sectors must think long-term and invest in purchasing and effective supply chain management to grow.
Based on the findings of the Doing Business in Britain: A culture of spending apathy? report, ERA has developed some top tips for businesses looking to implement a smarter spending strategy:
Top tips for Smarter Spending for Business1. Implement company-wide supply chain guidelines. These should include clear company processes and policies for employees as well as for reviewing suppliers. Organisations need to answer when, why, how and who makes these supplier review decisions.
2. Develop and enforce an integrated approach to purchasing decisions. Present quarterly supplier reviews to the board. These should not just focus on cost reduction but metrics such as quality control, supplier relationship and company reputation.
3. Create a key skills framework for people responsible for frontline purchasing decisions. Invest in the purchasing function through ongoing and regular training to be able to implement best practice purchasing.
4. Effective a cost management strategy. Ensure you have the expertise in-house or via an external source to devote time to the purchasing process and build effective long-term supplier relationships.
This report concludes that supplier relationships are not currently viewed as strategic partnerships. Suppliers are often held at arm’s length and reactive decisions around price dictates whether a contract remains in place regardless of service or strategic value.
Specialist Procurement Advisors
Profitability and efficiency are atthe heart of every organisation.Put simply, the best way to boostyour bottom line is to sell more orspend less – or both.
Effective procurement is crucial but often neglected – either outsourced to cost-cutting consultants or passed to an in-house finance team. But used as a strategic function, with full support from the boardroom, it can deliver enterprise-wide benefits.
ERA goes far beyond the short-term savings of consultants and the limitations of in-house teams to deliver long-term financial and organisational benefits.
We deliver:• expertise spanning a wide array of
supply areas• a lasting and positive influence across
the entire supply chain• a more strategic, smarter spending
culture across your organisation• profit to your bottom line, today,
tomorrow and into the future
Expense Reduction Analysts Specialist Procurement Advisors10
Specialist Procurement Advisors Expense Reduction Analysts 11
Alex WilliamsonCFO at Goodwood
“I have been very impressed with the rangeand the margin of savings that ERA has beenable to deliver. They have rationalised our purchasing,simplified our back office processes and generatedimpressive savings, all the while maintaining the trustof our key suppliers and my own staff. Of particularnote have been the environmental advances that theyhave proposed, especially in connection with themanagement of waste from our events. I look forwardto a long term partnership.”
Goodwood on course for glorious savings
Purchasing influencethat gives evenour biggest clientsextra weight
Expense ReductionAnalysts
Visit us at:www.expense-reduction.co.ukwww.expense-reduction.ie
Smarter Spending
Expense Reduction Analysts (ERA) is a global networkof specialist procurement advisors. Its teams enableorganisations to save money and boost business
supplier management and smarter spending habits.
ERA’s sector specialists build long-term relationshipswith medium to large enterprises, going beyond short-term gains to deliver objective analysis, informedmarket expertise and continued financial benefits.
