Procurement Under Pressure: Challenging the CFO’s Focus on Cost Reduction Targets

You know you're in procurement when you hear "cost reduction" more often than "good morning." Each quarter, you face a new set of cost-cutting goals from the CFO, often disconnected from the realities of sourcing and supply chain complexities. It's like being in a never-ending episode of "The Price Is Right," except nobody's winning.

Let's talk about how to change the script.

Understanding the CFO's Perspective (Yes, They Have Challenges Too)

Alright, let's start by begrudgingly admitting it: CFOs aren't just throwing cost-cutting targets around for fun. They have their own set of challenges to juggle:

1. Managing Across the Board: CFOs must pull together financial strategies for multiple products, divisions, and sometimes even entire companies. Creating a cohesive financial plan that keeps everyone happy? Not as easy as it looks.
2. Forecasting Profits and Cash Flow: They're also in charge of predicting how much money will come in and go out. This isn't just guesswork—it's about keeping the company afloat and profitable, which means finding ways to cut costs wherever possible.
3. Talking to Analysts and Investors: For public companies, CFOs must deal with analysts and investors who expect clear, positive financial guidance. Cost savings often make for a nice, clean story that can boost stock prices and keep investors smiling.
4. Handling Economic Curveballs: Inflation, supply chain issues, market changes—you name it, the CFO is dealing with it. Cutting costs is one way they try to manage these unpredictable forces and keep the company on stable ground.

So yes, while CFOs may seem obsessed with cutting costs, they've got their own pressures to manage. But let's not forget, focusing only on immediate savings can lead to bigger problems down the line—something you know all too well.

Why You Push Back

Every quarter brings a new cost-cutting target, and it's your job to hit it. But you also know that blindly chasing savings isn't the whole answer. Here's why you push back against those CFO-driven cost reduction mandates:

1. Targets Imply You're Failing: Random cost-cutting targets suggest that you aren't already securing the best costs and disregard the complexities of procurement and the strategic decisions you make every day.
2. They Ignore Your Role: Targets ignore the fact that your job isn't just about finding the lowest price; you're balancing cost with quality, delivery times, and supplier reliability. You're strategically sourcing, not just bargain hunting.
3. It's Not a Game: But arbitrary cost reduction targets tied to compensation turn it into a game, and you know how to win games. For example, if you negotiate a 10% cost reduction, should you take it all at once or 2% for the next five quarters? Depends on the rules of the game.
4. They Encourage Corner-Cutting: When all that matters is meeting a savings target, it can lead to questionable tactics. Maybe you're tempted to switch to a cheaper supplier, even if it means compromising on quality or delivery. But you know that short-term wins can lead to long-term headaches—like increased defects or delays that cost even more.
5. They Ignore the Big Picture: Focusing only on upfront costs is a mistake. You know that the true cost of a purchase includes everything from acquisition to disposal—the Total Cost of Ownership (TCO). A supplier with a slightly higher price but better quality and service can save more money in the long run by avoiding hidden costs.

By pushing back, you're not just resisting the CFO's targets—you're advocating for a smarter, more strategic approach to procurement that considers all the factors that contribute to your company's success.

The Importance of Total Cost of Ownership (TCO)

To move beyond short-term cost cuts, consider advocating for a Total Cost of Ownership approach:

• Holistic View: TCO considers all costs associated with a purchase, not just the initial price. This includes maintenance, downtime, and disposal.
• Long-Term Savings: Opting for a supplier with a higher upfront cost but better reliability and quality can reduce costs over time, avoiding issues like product defects and delays.
• Strategic Decision-Making: By focusing on TCO, you can align sourcing decisions with long-term company goals, ensuring sustainable value rather than just short-term savings.

Measuring Total Cost of Ownership (TCO) for Electronic OEMs

1. Initial Purchase Costs

• Standard Cost: The budgeted or expected cost of components or PCBAs used for setting pricing benchmarks and budgeting. This is the baseline cost used to measure cost reductions.
• Purchase Price Variance (PPV): The difference between the standard cost and the actual purchase price paid. This metric captures savings (favorable PPV) or higher costs (unfavorable PPV) due to market changes or supplier negotiations. PPV is realized when items are received, not when the purchase order (PO) is placed.
• Shipping and Handling: Costs associated with transporting components or PCBAs, including freight charges, customs duties, and any special handling fees.

2. Acquisition Costs

• Testing and Inspection: Costs associated with testing and inspecting components or PCBAs upon receipt to ensure they meet quality and specification standards.
• Setup and Integration: Expenses related to setting up and integrating components or PCBAs into the final product, including labor costs and any special equipment or tools required.

3. Operating Costs

• Energy Consumption: The cost of energy required to operate equipment used for the assembly or testing of components and PCBAs.
• Maintenance and Repairs: Costs related to the maintenance and repair of assembly equipment or reworking defective components or PCBAs.
• Consumables and Supplies: Ongoing costs for consumables used during assembly, such as solder, flux, or other materials.

4. Downtime Costs

• Production Delays: Costs associated with any delays in production due to component shortages, quality issues, or equipment downtime.

5. Cost of Quality

• Rework and Scrap: Expenses incurred when components or PCBAs fail to meet quality standards and must be reworked or scrapped, including the labor and material costs associated with these activities.
• Quality Risks: Potential costs due to quality issues, including returns, warranty claims, or customer dissatisfaction. These could be related to component failures, PCBAs not meeting specifications, or reliability issues discovered during the product's lifecycle.

6. Resilience Costs

• Supply Chain Risks: Costs related to potential disruptions in the supply chain, such as delays in component delivery or geopolitical issues affecting suppliers.
• Backup and Contingency Planning: Expenses associated with developing and maintaining backup suppliers, inventory buffers, or contingency plans to mitigate risks and ensure continuous operation.

Observation: Initial purchase costs are direct costs, typically part of the cost of goods sold (COGS), and are relatively easy to measure. In contrast, the other elements—acquisition costs, operating costs, downtime costs, cost of quality, and resilience costs—are indirect. They are often not attributed directly to COGS and can be challenging to measure, yet they significantly impact the total cost of ownership.

A Better Approach: Strategic Alignment in Procurement

To truly leverage the value you bring, companies must shift from a narrow focus on cost reduction to a more strategic approach. This means using established models and best practices to measure and enhance the effectiveness of your procurement and supply chain activities.

• Utilize TCO Models: Incorporate Total Cost of Ownership models like Gartner's TCO Model or the CIPS TCO Model to capture all costs associated with procurement decisions. This approach ensures you're considering not just the purchase price but also operating costs, maintenance, quality, and risk, aligning procurement strategies with the broader organizational objectives.
• Implement the SCOR Model: Use the Supply Chain Operations Reference Model to evaluate and improve supply chain performance across key areas such as planning, sourcing, and delivery. By benchmarking your activities against industry standards, you can identify areas for improvement and ensure your supply chain is operating at peak efficiency.
• Adopt the Balanced Scorecard: Align your procurement strategies with the company's vision and goals by using the Balanced Scorecard. This tool helps you measure performance across multiple dimensions, ensuring that procurement is not just a cost center but a key driver of organizational success.
• Leverage the Kraljic Matrix: Use the Kraljic Matrix to prioritize procurement activities based on risk and profitability. This model helps you manage supplier relationships strategically, focusing resources on critical components and PCBAs that are essential to your operations.
• Embrace Lean Six Sigma: Optimize your supply chain processes by adopting Lean Six Sigma methodologies. By reducing waste and improving process efficiency, you can ensure that procurement contributes to overall operational excellence, enhancing both quality and cost-effectiveness.

By integrating these models and tools into your procurement strategy, you can move beyond simple cost-cutting and develop a more strategic, value-driven approach that aligns with your company's long-term goals. This approach not only enhances supply chain effectiveness but also drives sustainable growth and competitiveness in the electronics industry.

Steps to Challenge the Status Quo

To drive meaningful change in procurement practices, it's essential to challenge unrealistic cost reduction targets and advocate for a more balanced approach. Here's how you can start:

1. Identify Misaligned Incentives: Highlight how current cost-cutting incentives may encourage short-term gains at the expense of long-term value. Emphasize that when procurement teams are rewarded solely based on immediate cost savings, it can lead to behaviors like cutting corners, compromising on quality, or neglecting strategic supplier relationships. Point out that aligning incentives with broader company goals—such as quality, innovation, and sustainability—can foster a more strategic and effective procurement function.
2. Educate Stakeholders: Highlight the importance of TCO and the risks of focusing solely on cost cuts. Use data and case studies to show the benefits of a holistic approach that considers all costs associated with procurement decisions, including long-term value and risk mitigation.
3. Promote Strategic Value: Emphasize your role in driving long-term value through quality, innovation, and risk management. Showcase how strategic procurement decisions contribute to overall business success, not just short-term financial metrics.
4. Push for Better Metrics: Work with leadership to develop performance metrics that reflect the full scope of your contributions, not just immediate cost savings. Advocate for metrics that consider factors like supplier reliability, quality improvements, and total cost of ownership. To support this, leverage the right Procure Tech solutions for your organization:
   • For Organizations Using SAP or Oracle: Utilize SAP Ariba or Oracle Procurement Cloud. These platforms integrate seamlessly within their respective ecosystems, providing comprehensive procurement tools that align with existing infrastructure.
   • For Companies with Diverse ERP Systems: Consider solutions like Coupa, Jaggaer, GEP SMART, Ivalua, or Zycus, which offer robust integration capabilities and flexibility. These platforms help implement advanced procurement strategies and ensure data consistency across different ERP environments.
   • For Smaller Organizations or Those Using Excel: Adopt user-friendly platforms like Procurify, optimized for small to mid-sized businesses. These solutions facilitate a smooth transition from manual processes to digital procurement management without requiring extensive ERP integration.

Handling Difficult Conversations Informally: A Step-by-Step Approach

Navigating challenging conversations with superiors doesn't always have to be formal or confrontational. Sometimes, an informal, conversational approach can be more effective. Here's a more casual, four-step strategy for approaching these discussions:

1. Casually Highlight the Issue
   • Start with a Simple Observation: Begin the conversation by casually mentioning an observation or insight. For example, you might say, "Hey, did you know that this focus on cost-cutting is causing some quality issues with our suppliers? It's something I've noticed lately."
   • Gauge Their Reaction: Pay attention to how your superior responds. If they seem interested or ask for more details, it's a good sign that they're receptive to what you're saying. If they brush it off, consider holding back and waiting for a better time to bring it up again.
2. Show Sympathy for Their Priorities
   • Acknowledge Their Focus: Demonstrate that you understand their existing priorities and the pressures they face. For instance, you could say, "I know cutting costs is really important, especially given the budget constraints we're under. I completely get why it's a top priority right now."
   • Align Your Comments with Their Goals: When you bring up your points, try to link them back to their priorities. For example, "I've been thinking about how we could keep those cost savings you're targeting but maybe also avoid some of the quality issues we've been seeing. That way, we're hitting our budget goals without any setbacks."
3. Offer to Provide More Information
   • Be Ready with Data: If your superior shows interest, offer to share more detailed information. You could say, "I'd be glad to provide some data and examples to show how this issue is affecting us. It's more widespread than it seems." This step is about opening the door to a deeper conversation without overwhelming them upfront.
   • Keep It Light: Present the offer in a casual way, making it clear that you're not trying to push an agenda but are genuinely interested in helping. For instance, "I've got some numbers that might be helpful; no pressure if you're not interested right now."
4. Suggest Solutions Playfully
   • Express Willingness to Help: If the conversation continues positively and your superior asks for your input, frame your suggestions as if you're honored to contribute. "You want my thoughts on solutions? I'd be honored! Here's what I think we could do to tackle this..." This approach makes it clear that you're eager to help and value their input while still showing humility.
   • Offer Practical Ideas: When you present your suggestions, keep them practical and actionable. For example, "Maybe we could look at re-evaluating some of our supplier contracts or perhaps think about a more balanced approach to cost savings. Just an idea, but I think it could really help!"

By using this informal, conversational approach and showing empathy for your superior's priorities, you can address difficult topics in a way that feels more natural and less confrontational. This strategy helps to build rapport, align your insights with their goals, and introduce suggestions in a positive, engaging manner. It allows for a gradual escalation from a simple observation to offering solutions, all while keeping the conversation light and approachable.

Now Change the Script

The pressure of procurement can feel like being on a reality TV show, constantly testing your ability to cut costs. But you know the real prize is creating a resilient, efficient supply chain. So, the next time the CFO asks for another round of cost cuts, just smile and say, "No, I'm focused on other things." 

Just kidding. Smile and say, "Yes boss", always respect the CFO's position and weighty responsibilities, but that respect includes letting them know the reality of what you're really observing.