Markets & Investing
Supplier Cost Reductions Boost FTSE 350 Earnings Twice As Much As Job Cuts
24 Sept 2020
New research from Proxima shows that 70% of FTSE 350 spend goes on suppliers
Reducing supplier costs would improve EBITDA of FTSE 350 companies by over twice as much as cutting jobs, new research from the procurement consultancy Proxima has found.
The research, undertaken with the assistance of the Centre for Economics and Business Research, shows that FTSE 350 companies would get a 27% boost in EBITDA from a 10% cut in supplier spend whereas they would receive just an 12% increase from a 10% drop in workforce costs.
The research is contained in Proxima The State of Spend 2020 report, which shows that average supplier costs make up 70% of FTSE 350 companies’ total spend and 60% of their revenues.
The report also reveals significant variation between sectors. Companies in the industrials, consumer discretionary and consumer staples sectors have the highest supplier spend levels as a percentage of overall spend, meaning they most likely to benefit from spend reductions. Comparatively, supplier spend makes up a much smaller percentage of spend for companies in the technology sector and financial sectors.
Gareth Evans, Chief Executive of Proxima, said: “Our research demonstrates the crucial importance of managing external supplier costs. At a time when many FTSE 350 companies have been buffeted by the impact of COVID-19 and are making tough choices about jobs, this shows that they should be treating supplier cost management as a strategic priority.
“Business leaders should be looking to supplier costs as a primary source of saving money and increasing flexibility. At a time when companies are seeking to reduce outgoings and create a more variable cost base – supplier costs are where the biggest impacts can be made.”
“That 70% of FTSE 350 companies spending now goes on suppliers should also be food for thought for C-Suite executives looking for growth. How can that 70% be spent more efficiently to foster greater innovation? And with supplier spending so high, how can risks be appropriately managed and mitigated?”
Proxima also analysed the spend of Fortune 500 companies and found that they would see an even greater boost to EBITDA from cutting supplier costs, with a 10% reduction generating a 32% surge in EBITDA. Bringing down supplier costs would boost EBITDA by three times more than cutting workforce costs by the same percentage. Supplier costs make up 75% of the spend of Fortune 500 companies, more than 5% higher than the equivalent figure for the FTSE 350.
