How to Leverage Procurement During times of Economic Distress

Procurement departments play a vital role in any organization, but their importance is particularly highlighted during times of economic distress. These departments are responsible for acquiring goods and services for the organization, and they play a crucial role in ensuring that the organization is able to continue operating despite economic challenges.

Economists believe a recession in 2023 will be inevitable (The Economist, 2022). The higher inflation and interest rates, in addition to geopolitical risks, might impose further challenges to corporations in various industries. Senior leaders in all areas should prepare for the year ahead to achieve the best possible results. One way of doing it is by having effective procurement strategies.

One of the most important responsibilities of procurement departments, especially during recession times, is cost management. Organizations that are facing economic challenges need to be able to control their costs as much as possible in order to stay afloat. Procurement departments are responsible for identifying areas where costs can be reduced, such as by negotiating better prices with suppliers, and for implementing cost-saving measures.

Here are 10 procurement strategies that can enable cost management in recession times:

1. Contract renegotiation: During times of economic distress, organizations may want to consider renegotiating contracts with suppliers in order to reduce costs. This could include negotiating lower prices, extending payment terms, or changing the scope of the contract. Renegotiating contracts can help organizations to reduce costs while still maintaining a good working relationship with suppliers.

2. Planned contract renewal: Organizations can reduce costs by planning for the renewal of contracts well in advance. This could include starting negotiations with suppliers well before the current contract is set to expire, or implementing a process for reviewing contracts on a regular basis. By planning for contract renewal in advance, organizations can reduce costs and ensure continuity of supply.

3. Vendor consolidation: Organizations can reduce costs by consolidating the number of vendors they work with. By working with fewer vendors, organizations can negotiate better prices and terms, and also have more control over their supply chain.

4. Mitigate supplier risk: During times of economic distress, it's important for organizations to be aware of any potential risks in their supply chain. This could include risks such as supplier bankruptcy or natural disasters. Organizations can mitigate these risks by diversifying their supplier base, implementing risk management processes, and having contingency plans in place.

5. Delay project expenditures and large expenses: Organizations can reduce costs by delaying large expenses or project expenditures until the economic situation improves. This could include postponing the purchase of new equipment or delaying the launch of a new product or service.

6. Put more spend under management: Organizations can reduce costs by putting more of their spending under management and avoid using credit cards for operational costs. This could include implementing category management or assigning a dedicated person or team to manage procurement in each department. This could include ensuring that all procurement is conducted through a competitive bidding process, or that all procurement is conducted in accordance with the organization's code of conduct.

7. Outsourcing: Organizations can reduce costs by outsourcing certain procurement functions, such as purchasing or logistics. Outsourcing these functions can help organizations to reduce costs by taking advantage of economies of scale and specialized expertise.

8. Demand aggregation: Organizations can reduce costs by aggregating demand for goods and services. This could include forming purchasing consortia with other organizations or working with suppliers to create demand-driven supply chains.

9. Look for Suppliers who have not been Sourced Recently: Organizations can reduce costs by looking for new suppliers who have not been sourced recently. This could include working with smaller suppliers or those located in different regions.

10. Put more suppliers under contract: Organizations can reduce costs by putting more of their suppliers under contract. This could include creating long-term contracts with key suppliers or implementing supplier performance management programs.

Effective procurement can make a significant difference in an organization's ability to endure economic challenges and emerge stronger on the other side.