Cutting Costs & Getting It Right

With much of the Western world still dealing with soft economic conditions, it's not surprising that controlling costs will remain a top priority for many companies this year.

Not surprisingly either, it's likely that many of those cost-control directives will fall to the supply chain and procurement teams. Commonly, the finance department believes improved sourcing and purchased practices will drive profits, or at least help balance the balance sheet.

Supply chain and purchasing executives, you already know this drill, but here are a few insights that may help you better prepare for this year's round of cost-cutting evaluations.

GEP, a procurement services and software provider, points out key trends impacting sourcing and procurement organizations, and forecasts the direction important purchasing categories will take in its Strategic Sourcing and Procurement Outlook 2013 (registration required).

Here's a brief summary of a few trends that caught my eye, which I think will have significant impact on the way parts are sourced, bought, and delivered this year:

• Rising transportation costs: Prices in the worldwide transportation industry will increase 3 to 5 percent. Additionally, ocean carriers will feel the pressure to deliver cost savings on recurring expenses and hang onto contracted rates. GEP says in order to mitigate this, carriers "will tighten capacities by idling equipment and consolidating volumes amongst themselves. Due to margin pressures, the freight forwarder and brokerage industry will also look for consolidation."


• The cloud factor: Cloud computing continues to pinch pricing at traditional ERP software vendors, and GEP expects to see an acceleration in the migration of more software to the cloud. According to the company, "The traditional ERP vendors (SAP and Oracle) are not moving to the cloud fast enough and will continue to lose market shares in their core markets. Ask for steep discounts using the cloud as leverage in 2013."


• China becomes less of a low-cost country: Although China and low-cost have been synonymous for a decade or more, the profile of the country is definitely shifting, and executives will want to take heed. A few things are driving up manufacturing costs there -- rising wage rates, energy prices, and currency exchange rates, plus a stricter regulatory environment.

  As GEP points out, "China, in its current 'FiveYear Plan on Employment Improvement' aims at adding 13 percent annually to its minimum wage rate, from 2011 to 2015. The Chinese Yuan is now approximately 25 per cent more expensive than in 2005 and is expected to continue to strengthen in the coming years. Oil prices have gradually risen ever since touching the rock bottom of $32 in late 2008 and freight costs, as a percentage of total landed cost, have increased significantly. Taken together, these factors make China less attractive from a pure cost perspective across several categories."

GEP adds that while many categories of Chinese suppliers have been able to offset some of these costs by increasing automation and remaining competitive, many procurement managers are re-examining their options in China and considering other destinations including Mexico, Brazil, India, Southeast Asia, and East Europe.

I would love to hear what trends you're following, and where your supply chain team and the finance department are finding common ground.