The pandemic has torn apart business revenue streams like never before and forced many companies to make difficult decisions to reduce or eliminate costs. Unfortunately, those costs sometimes include mass numbers of employees.

Time and time again, we see that supplier spend is a much better place for companies to focus, rather than job cuts. It is often overlooked (even by senior business leaders) when employee costs are a relatively small portion of most big companies’ budgets.

Cutting external supplier costs could boost EBITDA by three times more than cutting workforce costs by the same percentage, as shown by our research. A substantial increase to EBITDA can be associated with cutting supplier costs, with a 10% reduction generating a 32% surge in EBITDA. On average, three-quarters (75%) of Fortune 500 companies’ costs go toward external suppliers, while the remaining 25% is spent on employment costs.

Sectors most impacted by labor costs

Companies are able to boost savings and strengthen their position to succeed with small strategies that they can launch now. Bringing down supplier spend is crucial for long-term success and will provide strategic headroom that will enable businesses to make better choices in the future.

For many businesses, it may also provide workforce headroom that allows for staff retention where they may otherwise have had to let them go.

As business sectors struggle to boost earnings and continue to reduce the size of their workforces, they need to understand the percentage of supplier costs that account for total business expenditures.

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"Bringing down supplier spend is crucial for long-term success."

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Companies in information technology and financial services have the highest share of labor costs (38% and 45%, respectively).

Relatively low wages in wholesale, retail, administrative and support service sectors show that labor costs make up only a small share of total costs among Fortune 500 companies.

High capital costs in the mining sector show that external supplier costs account for 82% of businesses’ total expenditures.

In the human health services sector, employment costs account for 51% of total spending, which is due to the large workforces and relatively low reliance on capital expenditures in this sector.

Short- and long-term fixes

There are numerous short-term levers that can be pulled here — things like reducing consumption, negotiating prices, working capital or changing service levels.

There are also many more strategic approaches, which are likely to take longer but deliver much more value as well as more immediate measures. Zero-based budgeting is one example, which can make a dramatic short-term impact but needs careful management in the mid to long term.

That is not to say that it is all about cost reduction. If the same logic is applied to growth, the supply base is going to be a richer source of research and development, innovation and acceleration than internal sources. So, optimizing spend means considering all angles from cost to growth, efficiency to flexibility.

Suppliers are going to be key to accelerating out of the crisis and for future innovation and growth strategies.

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"Optimizing spend means considering all angles from cost to growth, efficiency to flexibility."

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In some sectors, we are seeing a seller’s market evolving, which means suppliers can be more selective with whom they choose to do business. In reality, businesses need to deeply understand the contribution of each dollar invested.

To "optimize" is not just about cuts, it is about making every dollar invested work for you in the way intended.

Working capital has become a main focus over the last several months. It is fair to say that in procurement, at least, working capital is used to focus on extending payment terms. In today’s world, businesses value cash and debt differently. There is a greater focus on the cash position of trading partners and accounts receivables.

The new year and beyond

Businesses are quickly realizing that they need to ensure liquidity in the supply chain, whereas in the past, it was often about improving their own cash position.

To target a more optimal performance, some should depend on liquidity in the supplier chain, rather than just protecting one’s own position.

What are some key indicators that businesses should look for in their supply chain? Some may include:

• How much cash organizations carry into future lockdowns.
• How they have managed to reduce their overall cost base and fixed cost exposure.
• How responsive their supply chain is to changing demand patterns.

With supplier cost accounting for about 70% of total costs, these last two points are key to be able to respond to customer demands, and not be burdened with unnecessary stock or debt.

It is important to recognize suppliers are an important source of innovation and delivery, as well as cost percentage, as such a high percentage of spend is going toward suppliers. Bringing down supplier spend for the future must be done in a professional and structured manner — identifying which suppliers are adding value and where excess spending can be cut.

Entering the new year, businesses should identify current and future trends in their respective sectors to create long-term strategies. Depending on the opportunity, a proactive outlook on future goals and cost restructuring can prevent the harmful reduction of employee overhead and other valuable resources, impacting long-term success.