Procurement Quick Wins: the SMART Segmentation Imperative

Procurement Quick Wins: the SMART Segmentation Imperative

April 30, 2020

How to handle the trade-off between savings and supply risk

In times of crisis such as Covid-19, it is not the strategic long-term forecast that businesses lack, but powerful immediate measures and effective processes to overcome the crisis and remain capable of action – whatever the path to the new normal will be.

Precise immediate measures can keep companies on track during the current crisis.
Precise immediate measures can keep companies on track during the current crisis.

This is precisely where Roland Berger comes in. We combine our extensive experience in restructuring, performance improvement and crisis management with comprehensive and proven expertise in operations. We help companies, especially during shutdown and recovery phases, secure liquidity and keep the blood circulation in core corporate functions stable. We must extinguish the fire before redesigning the house.

The Firefighting Case for Operations

This approach naturally requires a shift in perspective. In an extremely confusing and threatening situation, the emphasis must be on tactics and on taking rapid action to counter the dynamics of the crisis. The pressure resulting from the combination of a demand and supply shock requires swift action to, for example, exploit potential one-off effects and lock-in historically low price levels across all areas of expenditure. In this context, corporate functions that have an immediate positive impact on the financial situation - including Operations in general and Procurement in particular – are in demand. Within the framework of networked and multidisciplinary collaboration, they must ensure that short-term P&L effective savings levers are identified and used consistently.

Shifting the focus successfully toward quick wins requires a sophisticated program, based on a smart combination of classical methods of cost reduction with highly innovative, scientifically based approaches and a portfolio of digital solutions.

This includes the use of game theoretical instruments, a redesign of existing contract structures and pricing mechanics as well as the use of automated benchmarking and AI-empowered data analytics – all adapted to the respective industry specifics.

Our programs include the use of game theoretical instruments, a redesign of existing contract structures and pricing mechanics as well as the use of automated benchmarking and AI-empowered data analytics – all adapted to the respective industry specifics.

The project experience that Roland Berger has gathered worldwide in recent years shows that a systematic and differentiated interaction of these elements can lead to significant savings within just 12 weeks. Depending on industry-specific factors and the structural characteristics of the company, these savings range from 3 to 6 percent at category level.

The Axiom for Resounding Savings

And not only that. The Quick Win programs realized this way also form the starting point for a medium-term cost transformation in the company. All aspects that are directly or indirectly relevant to P&L are optimized in close cooperation with the business functions and by using a wide range of instruments. The decisive factor here is a holistic perspective on the levers that have an impact on cost reduction and that are not exhausted in the traditional interplay of price and quantity. At Roland Berger, we firmly believe in what we call the "RB Savings formula": Needs x Specs x Quantity x Price = Maximized Savings . This is the indispensable fundament for sustainable cost reduction decisions and a fast and resounding impact on financial performance.

The SMART Way to Quick Wins

In a life-threatening crisis, quick and significant cost savings act like a desperately needed medicine. But good medicine is characterized by the fact that it does not irreparably deplete the body in order to cure the acute illness. We should therefore think carefully about what treatment we choose. In the words of the legendary human rights activist Desmond Tutu, a time of crisis gives a chance to choose well or to choose badly. The simple ways of achieving quick wins, like haircuts or simple prioritization, are not good remedies in a complex situation.

Roland Berger therefore relies on what we call "smart segmentation", an approach that allows a profound and holistic analysis of supply structures, commodities, and industry specifics. It aims to derive dedicated strategies for the various groups of suppliers and enables them to exploit not only the low hanging fruits but also the hidden cost reduction potential across all organizational functions, structures, and supply networks.

On the other hand, smart segmentation also means striving for a general optimum instead of a local maximum, e.g. not squeezing suppliers to the limit when their commitment, products and knowhow may be crucial to regaining traction and competitiveness after the crisis is over. In other words, we must avoid reaching for the strongest medicine whose side effects may be toxic.

The Balancing Imperative

We therefore rely on Quick Win programs that take several trade-off relations into account. These include the consideration of risks by destabilizing critical suppliers, the possible limitation of assets that are critical for later growth as well as for higher resilience and flexibility, or the balancing between strong one-time effects and medium-term cost reduction opportunities.

This approach provides the balance necessary to survive the crisis and return to the growth path once the pandemic has subsided. The handling of this complicated equilibrium must take place individually. It depends on the specifics of the industry, the health of the suppliers, the structure of the relevant procurement markets and, finally, the maturity of the organization.

The current crisis requires us to act quickly and decisively. But it does not release us from the responsibility to choose well. Quick Win Programs are an indispensable building block for securing the viability of companies - if we implement them smartly.

Further reading
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