Archive: April, 2011

CHC helps a start-up

Vennsys, a consortium led by Veolia Water, was established in December 2010 to manage the metering services for Thames Water worth £300m. Earlier this year, I wrote that CHC had been asked to help support the start-up, specifically to develop processes and procedures for the new business and quickly mobilise critical indirect categories of spend such as recruitment, payroll and fleet (see “CHC’s pro-active and flexible approach results in more work”). Vennsys has experienced its fair share of growing pains which means that CHC’s experience as a trouble shooter have contributed to the success of the enterprise. The supply chain is now in place and CHC is handing over to new management team. CHC will be available for work from 23 May.

Cost cutting

When I meet directors for the first time, I like to ask them what they expect from procurement. More often than not they tell me that procurement should focus on reducing costs. Consequently a feature in the spring edition of CPO Agenda entitled “Cutting it fine” caught my eye. CPO Agenda asked a number of CPOs why the number one priority for most buyers at all levels is “cost cutting”.  

Adrian Turner of Apple UK provides some useful insight into the different facets of cost cutting but says that procurement needs to relate these to the broader business to get greater recognition. There are a number of fairly standard comments on educating stakeholders about employing life cycle costs and using quality improvement to bring down total cost.

Given that compliance in supply chain is poor in most companies – Aberdeen Group indicates there is up to 35 per cent non-compliance in supply chain transactions – I was surprised that only Jonathan Watt of State of Flux mentioned it. Procurement often reports big savings but only a fraction hit the P&L. Without the connection between what we say and what we do it’s difficult to build a trusting relationship and to see how procurement can engage in the broader agenda.

The New Deals

As an economic recovery dawns, executives are starting to see how the downturn has reshaped their businesses. In the drive to reduce both costs and risks, many companies have forged partnerships aimed at improving efficiency or pooling resources.

In a survey by CFO Research Services in March 2011 and sponsored by Ariba, nearly 80% of respondents said their company’s external relationships with suppliers, customers, and business allies will be “very important” to their ability to thrive in the recovery. In a separate question, nearly 60% of respondents said their company is much more or somewhat more likely to pursue strategic partnerships as a result of the economic downturn.

There have been many surveys showing that CFOs believe suppliers are important and yet procurement professionals often find the relationship with their finance colleagues challenging. The question I want to ask is simple: has anything changed to make this relationship easier and more productive for both parties?

Before the recession, businesses reduced costs and increased efficiency by outsourced, off-shored and unloaded non-core functions. In areas like warehousing and delivery, supplier performance was optimised by deploying new technology. These activities were spurred on by economic events like exchange rate variations and rising commodity prices. The recession, however, has been far more severe than any of these other recent economic events and businesses have responded by developing survival tactics to cut costs more dramatically and improve liquidity. Nowadays, managing an efficient supply chain requires executives to probe beneath the surface. Transactional efficiencies may create some direct savings but they do not deliver growth per se. However, the savings that result from maintaining a healthy cost position and managing working capital well can make new investment possible. By shortening its cash conversion cycle, for instance, a business can generate sufficient free cash flow to support an acquisition or joint venture without raising capital externally. Such a self funding strategy often serves as the most cost-effective way to finance growth.

CHC has helped Veolia Water successfully integrate 6 businesses acquired from United Utilities. Efficiencies driven from other parts of the business enabled the acquisition to be self funded. Two of these businesses are joint ventures where Veolia Water has either a majority holding or an equal holding with another company. These joint ventures supply services to other water companies to help them carry out expensive and risky capital projects such as the £300m treatment works for Brighton or undertake non-core functions such as the maintenance of exiting assets.

CHC has also been helping Veolia Water with a start up. Veolia Water recently won a contract with two partners to provide water meter reading services for Thames Water. The newly formed company, Vennsys, has a 10 year contract worth £300m. CHC has been supporting the start-up through procuring HR services such as recruitment and pay roll.

I think the recession has changed the way businesses operate. The survival tactics developed during the recession will continue to be deployed through out the recovery. Many of the most obvious opportunities related to non-core functions have delivered significant efficiencies and increased liquidity. These have helped businesses become more competitive and in some instances, have been used to fuel growth. As the economic recovery takes hold, businesses will be seeking more growth and looking to suppliers to help them.

Two speed recovery

It was encouraging to hear that M&A activity continues to grow. Figures reported this week show that activity in US jumped by 84% and Europe by 27% compared to the same period in 2010. The news of the mega deal between AT&T and T-Mobile demonstrates that some sectors of the global economy are growing in confidence.
Unfortunately UK manufacturing is not one of those sectors. It grew at its slowest pace for five months according to a survey reported today. The Markit/CIPS purchasing managers’ index fell to 57.1 last month, down from a revised 60.9 in February. The survey also found that UK manufacturers increased prices to offset rising raw material costs and slowing consumer demand. This supports my earlier conclusion (Will the Budget affect Procurement?) that procurement professionals can expect to be asked by suppliers for price increases.
“The mini-boom in UK manufacturing ran out of steam during March as faltering domestic consumer confidence, inflationary pressure and supply chain disruption combined to slow down expansion,” said David Noble, chief executive of CIPS.