THE BUSINESS REVIEW FOR PROCUREMENT LEADERS
Despite all the talk about “win-win partnerships”, the reality often proves quite different, with the stronger party opting for short-term efficiency gains rather than long-term shareholder value. CPOs concentrate on immediate savings because that is the nature of the framework they are allowed to work in.
But more suppliers are now complaining that they are being squeezed to the point where they do not have enough cash to finance future developments. In the case of General Motors and Delphi, this has forced the latter into bankruptcy protection.
A value chain is sustainable, argue the authors, when all the parties have sufficient free cash flows to satisfy their stakeholders and allow them to invest in physical and intellectual capital for the next business cycle. Conversely, a chain is unsustainable when one party owns a dominating share of its cash flows.
An analysis of the GM-Delphi relationship since 1999 suggests that GM has taken more than $5 billion of cash flow away from its suppliers – equivalent to an average of 1 per cent of their annual sales.
If CPOs want to have a serious impact on the long-term health of their companies, they will have to find an alternative to the short-term annual savings lever.
