Friday, June 24, 2011

Cost Management: Good Cost / Bad Cost

Cost Management: Good Cost / Bad Cost

The UK government’s search for spending cuts is in the headlines everyday.

Some actors were protesting the arts should be exempt from cuts because they were profitable and that the cuts would be damaging to their future success.

While not argued from the procurement perspective, these actor’s point is highly relevant to every organisation seeking to make spending cuts whether in the public or private sector, and one that every CPO should also be making.

The key point is there are “good costs” and “bad costs”. Good costs (or resources) are those that contribute to the company’s or country’s competitive advantage. Bad costs are those that have no major impact on performance. These actor’s argued withdrawing funding for the arts was actually damaging for the country as a whole, which is contrary to the desired outcome.

So what does this mean for CPOs and procurement? It means they must take control of cost to be seen as ‘cost managers’, not ‘cost cutters’. Cost cutting suggests a reactive, short-term, tactical activity. Cost management is a purposeful ongoing activity in search of cost optimisation. This is achieved when internal and external cost levels have reached a sustainable level to maintain a competitive advantage. This is constantly changing.

The question for the profession is how many CPOs are just responding to the pressure to cut and how many are at the table to engage in cost optimisation? The difference between the two represents a gigantic leap in performance for the CPO, the profession, your organisation and even your country.

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