Australia’s food commodity market is well and truly in inflation mode. The long-lasting drought, the devastating bush fires and now the uncertainty around COVID-19 are taking their toll. Just have a look at the prices for beef and lamb: they are up 50% compared to 12 months ago.

For most FMCG businesses, input costs outside labour make up 50-70% of revenue. Best in class Procurement functions manage to procure those goods and services with a 4-8% competitive advantage, which translate to doubling of the bottom line in our low margin industry.

What the leading companies do differently, is not rocket science, but requires a brutal focus and rigour to operationalise and sustain. It all starts with an area that is not very popular, but essential for the success: the underlying master data. Clean supplier master data and transparency on items allows companies to rely on highly sophisticated modelling tools to truly understand what is being procured at what price, where. This then equips the sourcing teams to make fact-based decisions and constantly push the envelope on the materials and services they procure and enables them to generate a better return for both their customers and their shareholders.

The alternative to reducing the input cost – increasing revenue by lifting prices – is an option that is not available to most FMCG businesses. No matter how valid the reasons for your price increase might be, years of Supermarket discounting have conditioned Australians to be accustomed to ever improving value in their household basket of goods. At the same time, flat wage increases have increased the number of cost-conscious consumers. With this, identifying sustainable and commercially viable procurement opportunities is more important than ever.

 

CALL TO ACTION

Procurement should resist the temptation to “throw the baby out with the bathwater” to head for the largest dollar saving to beef up margins. Without careful consideration of the impact to the overall business performance, isolated decisions can drive up waste, lower throughput, incur high transformation costs and hurt productivity.

A crystal-clear understanding of the requirements helps frame the key questions to consider:

• Are you looking for commodity materials or bespoke ones?
• Are your processes built to manage variability in quality and if so to what extent?
• Who are the right partners and how can you tell?
• Can we move some of our sourcing offshore, and if so, how can we manage quality?

The answers lie in a mix of careful research, testing, trials, communication, nurturing existing partners and forging new relationships, and challenging the status quo. Follow the motto ‘fail fast, fail often’ and encourage failure to push the boundary of what is possible. This is where the best results are found.

But moving further up the supply chain to buy cheaper is only one potential outcome. A well-run Procurement function adds real value in finding those goods or services that are cheaper and simplify your internal process.

Establishing the mindset in the team to continuously scrutinising the spend is where the model becomes sustainable. And investing in the team to expand their capabilities is a commitment that pays off.

In conclusion, your third party spend is most likely your biggest cost, and can be your biggest risk. With this in mind, it requires the same careful consideration as your labour costs and capital spend. Managing spend and suppliers holistically can result into a meaningful financial reward for your company (an important consideration in the current inflationary environment).

The impact a well-run Procurement function can make is tangible and measurable and flows straight through the bottom line; something that can’t be said for every strategy initiative.

 

Aleksander Strasek – Director; Pollen Procurement

 

Originally published in ‘Top Painpoints of FMCG’ in Inside FMCG