New research has found that spending 10% less on external suppliers could net FTSE 350 companies a 27% boost to their earnings before interest, taxes, depreciation and amortization (EBITDA).
By comparison, the study also concluded that a 10% drop in labour costs could yield a 12% EBITDA increase – in turn illustrating the real worth of cutting supplier costs.
When it comes to Fortune 500 companies, the difference is even greater; the research suggests cutting external supplier costs could boost EBITDA by three times more than cutting workforce costs by the same percentage.
The findings were published in The State of Spend 2020 report, which was conducted by consultancy procurement specialists Proxima together with the Centre for Economics and Business Research.
According to the report, for companies in both the Fortune 500 and FTSE 350, external supplier costs constitute the vast majority of their expenditure. For the Fortune 500 companies, it makes up on average 75% of their spend and 65% of their revenues. For FTSE 350 companies the corresponding figures are 70% and 60% respectively. This is precisely why making savings in this area can have such a noticeable impact on the bottom line.
With regards to the sectors where the spending cuts would be more beneficial, the State of Spend 2020 found differences between the Fortune 500 and the FTSE 350:
Among the Fortune 500, companies in the energy, consumer defensive and healthcare sectors are the most likely to benefit from supplier spend reductions. In the FTSE 350, companies in the industrials, consumer discretionary and consumer staples sectors are the most likely to benefit from supplier spend reductions.
In light of its findings, the research paper’s concluding remarks make two key points.
Firstly, the data shows that optimising supplier spend allows huge companies to make significant savings and boost EBITDA – much more so than making staff redundant. Moreover, the figures should remind C-Suite executives that suppliers play a crucial role in their businesses. They bring enormous value to companies by performing functions that other businesses cannot do themselves.
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