This case study shows a typical situation in which management accounting can be helpful. Read the case study now, but only attempt the discussion points after you have finished studying the chapter.

Company buyers across Europe aim to cut the cost of procuring raw materials, goods and services this year by 13%, the highest amount in four years. The aggressive target coincides with the arrival of the purchasing manager – once seen as an administrative function – at the finance director’s right hand side. But many of the 225 purchasing heads from financial services and manufacturing companies responding to an annual survey by software company Ariba admitted they had little idea what was being spent by other departments. For instance, 37% said they could account for less than 10% of the amount that their companies spent on services. Instead, to hit their cost saving targets, more buyers than ever said they will rationalise their supplier bases and pressurise those left to deliver more cheaply. They would continue to renegotiate contracts despite admitting that average year-on-year savings from contracted suppliers had fallen from 10% to 7% in the past year, the growing use of non-contracted suppliers based on low-cost countries apparently eroding the previously wide price difference between the two.

Discussion points 1 What is the role of the purchasing manager?
2 What are the limitations of forcing cost savings onto suppliers rather than looking to internal improvements?