SUPPLIER COST REDUCTIONS CAN BOOST EBITDA TO X3 TIMES MORE THAN JOB CUTS
The State of Spend
Proxima’s recent research, ‘The State of Spend’ conducted with the Cebr (Center for Economic and Business Research) finds that whether you look at the Fortune 500 or the FTSE 350, external supplier costs make up a huge proportion of both total spend and revenue, dwarfing labor costs.
This has two major implications.
Firstly, it means that supplier spend optimization offers a major source of potential cost savings – and, as our research demonstrates, is much more effective in boosting EBITDA compared with job cuts.
Secondly, it is also a reminder to C-Suite executives of the pivotal role suppliers play in their businesses. Selected and managed effectively they add huge value to companies, performing functions that businesses cannot do as well themselves.
At a time when many businesses are shrinking or looking to variabilize their cost base, our research indicates that job cuts will deliver less impact proportionately than optimizing supplier costs.
‘The State of Spend ’ report reveals where companies should be focusing their efforts to optimize spend, improve flexibility, and prevent job cuts. Access your free copy today.
Key observations from the report include:
1. Tackling external costs is key to sustainable EBITDA improvement
The current climate provides an opportunity to look again at existing supplier costs and determine what value can be delivered. At Proxima, we’ve found that most Fortune 500 and FTSE 350 companies can typically reduce their supplier spend by between 8% and 15% with a comprehensive program of cost reductions.
2. Reliance on suppliers means cost optimization must be executed in a smart way
Suppliers are a huge source of innovation and deliver critical outputs for most organizations. That means that while there is a big opportunity for savings, it is essential that cost-reduction programs are carried out in a smart way. Reducing costs is not without risk, if done badly, it could end up eroding rather than delivering business value.
3. Taking a strategic approach to supplier management is key
This report has pulled back the curtain on the strategic importance of suppliers to large global companies. Whether looking to free up spend to invest in new business areas or bring in external expertise to accelerate a project, suppliers are at the heart of many business decisions. Yet how many businesses can truly say they have a joined-up approach to managing suppliers that at the same time optimizes costs, mitigates risks and focuses investment in areas that will drive growth?
“Business leaders should be looking to supplier costs as a primary source of saving money and increasing flexibility. At a time when companies are seeking to reduce outgoings and create a more variable cost base – supplier costs are where the biggest impacts can be made.“
Gareth Evans, CEO Proxima
The impact of suppliers
Our research revealed that Fortune 500 companies’ external supplier costs account for (on average) 75% of their total spending and 65% of their revenue. Similarly, our report revealed that FTSE 350 companies’ external supplier costs make up for 70% of their outgoings and 60% of their revenues.
Fortune 500 and FTSE 350 companies could expect to see a 32% and a 27% surge in EBITDA, respectively from just a 10% cut in supplier costs. As such, undertaking thorough supplier cost analysis and subsequent supplier cost optimization is essential to ensure your business can remain agile and flexible.
Not addressing the enormous impact that suppliers can have on your business outcomes may be acceptable in the short term. However, over time, uncontrolled and escalating costs will become detrimental to businesses’ ability to adapt in this uncertain economic climate — impacting growth. Read further on this topic here.
At Proxima, we helped an established supermarket chain reduce GNFR (Goods not for Resale) costs by over $350m in the first four years of our relationship — that’s nearly $100m above target. Click here to see how we achieved this, as well as how procurement continues to benefit.
Supplier cost reduction challenges
While reducing supplier costs to improve flexibility might seem like a simple tick-box exercise, in practice, it can be a lot more complex. With a shifting and increasingly volatile supplier base, it’s difficult to have someone who is an expert in every area where you spend money.
This may mean you’ll rely on processes (the classic method being RFPs) and a limited number of benchmarks to make supplier spending decisions. As a result, you will be unable to act with the speed and certainty that you might like to maximize savings. Replicate this method company-wide, and you’re looking at tens of millions (if not more) in excess delay and costs.
At Proxima, we have decades of experience helping some of the biggest US and UK companies reduce their supplier spend with our supplier cost reduction techniques. If your business could save millions, imagine where you could invest that money instead.
Get in touch to see how we can help you reduce supplier spend, enhance your business agility, and offer an alternative to job cuts in today’s changing climate.
If you would like to read more on this subject then our report expands on each of the elements we have explored here
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