- 20
- SEP
- 2011
What is the best procurement strategy for the recession?
Author: - Categories: Working Capital
Procurement - representing a high proportion of costs - is a critical area of improvement for private equity firms when trying to turn companies around. Managers and owners need to focus on this particular aspect of the business and choose the right strategy to improve performance and profitability.
There are typically two strategies for the management of procurement for private equity firms.
One is to group categories across different companies in the portfolio, focusing on the achievement of economies of scale when purchasing goods and services. The other is to keep the business separate and focus on the different supply chains separately.
What happens during a global recession and which strategy is more appropriate?
When grouping different businesses to achieve economies of scale procurement activities tend to become more rigid. There is the potential for increases in inventory costs and issues to arise surrounding the annual operating planning phase of the different businesses, as well as in the marketing planning phase of products. Even if they belong to the same category, different end products have different needs in order to reach the end market; therefore, agility becomes an important quality that is difficult to demonstrate when supply chains are forced to be coordinated.
A recession has different impacts on different supply chains. Rapid changes in demand for or supply of certain goods have a different impact on the different supply chains. This can have implications for the risk that must be shared across businesses and has a direct impact on their profitability. The least efficient procurement organisations are in danger of dragging down the entire group and therefore the overall market valuation.
My conclusion is that keeping businesses detached can have payoffs during a recession. Managing supply chains in the same portfolio of investment with standalone procurement activities offers the benefit of agility. It is easier to focus on a more detailed analysis of single businesses than it is to assess capabilities along the whole supply chain. This method offers a potentially quicker exit strategy from investments in a single business, without affecting the overall investment strategy.
