I’ve seen several critical trends that I believe procurement will pursue in the next few years. Today, I’m concentrating on the top three. These are in addition to the procurement table stakes1 -- namely cost and supplier management.
Trend 1 - Agility
At Davos World Economic Forum in 2018, Justin Trudeau said "the pace of change has never been this fast, yet it will never be this slow again."2 So true for procurement and the technology.
We can see that procurement is evolving from mainly being focused on efficiency (which is becoming more and more automated today) -- to now being measured on effectiveness of its contracts; how much they are used; what innovations they bring; and how much money procurement contracts and operations save organizations.
For several years, organizations have recognized that market change has increased the need for speed and adaptability. As a recent research report about procurement agility from World Commerce & Contracting concludes, “about one in six took action. But this left more than 80% of organizations seriously exposed when facing the mass disruption of a global pandemic. It is therefore no surprise that ‘agility’ has risen high on the agenda, especially for the commercial [procurement] teams which have such a critical role in establishing external relationships… For them, ‘becoming agile’ is not only essential to their business, but also to their own relevance and status as a function.”3
Have we not already seen in 2020, in spite of the pandemic, that procurement has proven to be agile? When responding to the needs of the business, procurement teams have not run complex 12-week sourcing cycles! So, now that we are coming out of the pandemic, the question is why can't we keep that agility by:
- being responsive to needs of business;
- adapting to these changing business needs;
- leading and shaping these needs; and
- adapting the type of contracts procurement uses.
The World Commerce and Contracting report3 also says the top reasons for adapting agile methods are to enable us to move rapidly to make the needed changes to support innovation and to align business operations accordingly.
Procurement functions then need to consider how to harness this agility and the technology to deliver the results potentially by automating sourcing back to the stakeholder; perhaps by using marketplaces for simple one-off or low-strategic value spend; and perhaps by using networks to identify and collaborate with key suppliers.
Trend 2 - Risk Management and increasing visibility
A report from Ardent partners, titled Bad Moon Rising: Global Supply Chain Risk Reaches 20-Year High4 contains a quote that made me chuckle. “Well I didn’t expect that.. Nobody expects the Spanish inquisition…” It meant that people may have been prepared for smaller, more local risks, but they never considered large-scale risks.
Improving visibility in the supply chain has been included on many company agendas for a long time. Clearly 2020 has increased this need, because we clearly must identify all suppliers regardless of whether they are directly or indirectly connected to our organization.
It is never simple or quick to look beyond tier one and tier two suppliers5 to determine the source of raw materials or understand who really provides the service. Unless companies keep a closer eye on their suppliers -- especially further down the supply chain with all subcontracting issues -- they will never be sure they understand where they are most vulnerable.
The report from Ardent partners4 said that 79% business did not have a risk management program in place at the start of the pandemic for strategic suppliers. This practice must change! Supplier risk needs to be governed more rigorously and systematically by putting robust risk sensing and supplier-monitoring capabilities in place now.
In preparing for the millennium, I was leading procurement seminar at a financial services company in the UK. To prepare, we created a whole series of scenario plans by asking and answering questions like what if the entire power grid shut down spawning darkness everywhere? What if we had no energy for heat? What if our computers shut down? Everything stops!
In response to such potential scenarios, some organizations will create emergency response plans for wider business strategies; others will devise contingency plans accordingly. Likewise, the whole effort would involve planning for 2021 that would include creating contingency plans, identifying alternate suppliers for nearshoring, and investing in inventory.
You also need to know where the risks lie. Then to manage the risk, you need to know who your suppliers actually are, and have them profiled. You need to understand their sentiment toward you in order to detect early risk warnings. You need to decide then, whether to repair, replace or restart relationships.
According to the 2020 Deloitte CPO Flash Survey,6 only 50% of procurement leaders surveyed had high or very high visibility into their tier 1 suppliers, while 90% of organizations rated their visibility into their extended supply networks as moderate to very low. And 90% didn’t know what their supply chain looked like!
Ian Bremmer,7 head of the Eurasia group at the recent Procurement Reimagined event,8 stated that global supply chains are efficient, but do not drive resiliency. Surprising was the lack of knowledge that organizations had about the type of supply chain they administered or worked within.
When I was studying procurement (a long time ago, last century!), my mentors and professors drummed into me that the first duty of procurement was to secure supply. One way to guarantee continuity of supply is to imagine a variety of scenarios and plan accordingly, for example, scenario plans like those cited above.
Procurement teams will continuously develop scenarios by engaging in supplier development, using their networks to identify alternative suppliers and products, evaluating multisource strategies, and reviewing supply chain complexities. To find the lowest possible unit cost, many corporate supply chains became impressively intricate but, ironically, as the pandemic proved, they were too fragile to withstand major shocks!
Trend 3 – Supplier Diversity
Many companies are keen to redesign their supply ecosystem to simplify and streamline it, recognizing that it will save money over the long term by making it more regionalized and localized.
The 2020 Deloitte CPO Flash Survey6 revealed that 47 percent of respondents said they are planning to expand their overall supply base, while 25 percent of respondents plan to consolidate. Nearly all respondents suggested they are looking to either shift their global supply base footprint and/or activate nearshoring.
One reason large complex supply chains exist is they have been driven by contract bundling to gain leverage. But there is an adverse side effect. Although you increase your spend, you reduce the number of companies you can deal with, potentially weakening your negotiating position instead of strengthening it, because you have no other options.
To shift supply, to more local or near shoring, its likely you won't be able to replicate the supply chain, but will need to replace it in the aggregate.
In other words, unbundle! Deal with smaller organizations, and probably more of them. This gives you the perfect opportunity to diversify your supply base, connect to the communities you operate in and deliver on the organizational goals of purpose and community.
To create a supply ecosystem that aligns with the organization’s goals, procurement will also need to think hard about its modus operandi and how it defines success. These measures then could include cost savings, but are also likely to be about the number of contracts, number of diverse suppliers, amount of spend, and other essential measures.
The year 2020 has changed the world. If procurement leaders don’t want 2021 to become another 2019, we need to consider and learn from the lessons of 2020. If we don’t learn, then 2021 will be 2010 all over again, when procurement failed to capitalize on the momentum it gained as a profession from 2008 (the Global Financial Crisis [GFC]).9
- "table stakes" definition
- See article about Trudeau’s speech titled Noisy Decent Graphics;also reference World Economic Forum at Davos 2018 website.
- State of Agility in Procurement and Supply, World Commerce & Contracting global annual report 2020.
- Research Alert: Bad Moon Rising: Global Supply Chain Risk Reaches 20-year High, Ardent Partners. (See related article.)
- Difference Between Tier One and Tier Two Companies explained
- Deloitte perspectives article titled 2020 CPO Flash Survey reveals shifting procurement strategy amid pandemic.
- Ian Bremmer bio, background.
- Procurement Reimagined: A new virtual event from SAP
- See also article titled Global Financial Crisis: five key stages 2007 - 2011.
ABOUT THE AUTHOR
Within SAP, Gordon’s role as APJ Intelligent Spend Evangelist aims to infuse procurement and finance thought leadership to our intelligent spend management messaging both internally and externally. Having qualified with a graduate diploma in 1996 and achieving a master’s in strategic procurement, Gordon is widely recognized as a Fellow of CIPS and for his extensive work in procurement as both a practitioner and consultant in the UK and Australia. Gordon has delivered procurement transformations, strategy development, cost savings, process, and service improvements across a wide variety of categories and industries. He has also designed and implemented a range of assessment regimes to understand the current and future capability requirements for procurement teams. He is a sought-after speaker, writer, and presenter, and also a licensed SDI™ facilitator.