Adopting strategic procurement principles to fund a living wage
Adopting Strategic Procurement Principles
The budget announcement of the National Living Wage will see
workers aged over 25 in the UK paid a minimum of £7.20 an hour from
April 2016, rising to £9 by 2020.
This legislative change will have a huge effect on many sectors,
including retail which employs over 20% of those on the current minimum
wage. To put the cost into some context, a typical retailer employing
25,000 people on a rate of £7 would expect to incur an additional £100m
a year bill by 2020.
Although the direct increase in costs organisations will see are
self-evident, and have been heavily reported on, less attention has been
given to the additional cost inflation retailers will see through their
supply chains and specifically from their indirect costs, including
contracts such as catering, cleaning, logistics and warehousing.
Back to the example of our retailer, indirect costs can account for a
significant 10-25% of all expenditure but, whilst clearly a major cost
line, this does not in our experience receive a suitable level of
strategic focus and attention.
The task for all organizations will be how to respond to, and mitigate
such substantial future cost challenges without passing 100% of the
expense on to customers. As we see it there are two approaches that can
be taken:
- The tactical approach: Focuses on staff reduction or on reducing average age of the workforce. Some have also discussed the possibility of taking out costs by reducing perks such as staff discounts.
- The strategic approach: Focuses on the need for greater productivity in light of the wider structural changes of which the National Living Wage is a part. Relating this back to retail once again the sector has undergone fundamental change and disruption in the new digital age, and successful retailers continue to adapt to rapidly changing consumer demands on their businesses.
Forward thinking organizations are meeting these challenges by engaging
with suppliers, investing in systems, and getting the basics right with
a coordinated strategy across the supply chain, customer facing channels
as well as reviewing their underlying operating models.
Value released from effective indirect
procurement can enable and accelerate the strategic approach
with focus on this all too often untapped value pool. In the short term
significant savings can be found without some of the complexity and
trade-offs often required to find efficiencies in other areas.
In the longer term embedding strategic procurement principles into
every day thinking forms the bedrock for swifter adaptation to wider
structural changes and the mitigation of both the direct and indirect
costs that will entail.
In today’s every changing world and challenging environment there
is no set formula for whom will win or lose. What is clear though is
that successful organisations will not simply rely on a short term
tactical approaches but have a clear forward thinking strategy that
recognizes that traditional approaches and business models may no longer
work.
The introduction of the National Living Wage should only serve as an
opportunity to explore more strategic solutions and converging on
untapped resources allows organisations to release huge value in order
to drive or accelerate transformation programs, effectively using
strategic procurement as a business enabler.
