…What do you want Burr?
If you stand for nothing, then what'll you fall for?
I wanna be in the room where it happens…1
Procurement lives in the room where it happens, but the real question is, how do we stay there? Having been central to organizations’ COVID-19 survival over the last 18 months, today’s procurement is discovering new sources of supply; helping their supply partners with financial stability; building flexibility into the process; and solving problems creatively. But to continue moving ahead we must keep learning from past challenges to stand ready for unanticipated future events! This article reflects on how companies have improved procurement strategies and benefitted from those changes.
COVID troublemaker – pushing it behind us!
We identify the last 18 months as the big troublemaker ushering in the COVID-19 pandemic. Yet lessons from the past have revealed the value of new opportunities so that we are now:
- taking advantage of new sources of supply;
- securing the financial stability of our supply partners; and
- refocusing on our extended workforce.
We look to turning our smarter strategies into action for the next 5 years. So, what matters most now and in the future?
“According to “On Solid Ground,” a survey of 200 procurement and sourcing executives (director-level or higher) at companies with $200 million or more in annual revenue conducted by Wakefield Research for supplier intelligence platform Tealbook, 96% of respondents say being agile is more important than cost savings for their companies’ bottom line in the long run. This figure includes 42% who feel strongly that this is the case.” 2
Recovery – Procurement to the rescue (we’ve done it before)!
Exhibit 1 from McKinsey report3
Companies bouncing back from the pandemic suffered much loss. Many of the world’s largest economies experienced record-breaking economic declines. Yet procurement has helped us weather global crises before. As stated by a McKinsey Article,3 in the five years immediately following the 2008 Global Financial Crisis (GFC), total return to shareholders (TRS) for companies with top quartile procurement capabilities were 42 percent higher than for companies whose procurement operations were in the bottom quartile.4
McKinsey research also “found that companies with top-performing procurement functions saw valuations return to pre-GFC levels an average of three years faster and were able to lower costs of goods sold (COGS) as a percentage of revenue, thus improving EBITDA5 by 3 percentage points more than bottom performers.”6
A different approach
Although procurement can again play a crucial role in recovering from a crisis this time, when we consider the effects of the pandemic, we will want to take a different approach when considering a range of new issues.
Surveys conducted by leading research firms’ procurement leaders pointed to a significant difference between recovery efforts after the GFC and what’s happening now. At that time, most companies focused on strategies to recover from the financial effects of the recession. Today, in addition to recovering profitability and finding ways to preserve cash, companies face added challenges such as imperatives to:
- shift supply-market dynamics;
- change ways of working;
- increase volatile demand; and
- de-risk their supply chain to make it less vulnerable to disruption.
According to Deloitte, two-thirds of organizations are planning to pursue cost reduction strategies7 which could mean more sourcing events and more auctions which would shorten contract times and require renegotiating with incumbents. The recently released Hackett report8 echoes the same, verifying that cost reduction has again become top priority for procurement.
Nearly half of the survey respondents said they are planning to expand their overall supply base. This is a big change from the traditional way of reducing cost incurred by supply base reduction. Respondents are expanding their pool of suppliers for two reasons:
- First, many supply chains failed because they were global. By moving to more local supply chains they would increase their resilience, but because the local supply chains can’t do everything the global supply chains can do, they would also need more suppliers.
- Second, many organizations will be pursuing supply base diversification strategies. Indeed, in Hackett’s 2021 key priorities report, supplier diversity reached number 11, the highest ever. Backing this up, a recent survey by Gartner of 260 global supply chain leaders found one third (33%) had moved sourcing and manufacturing activities out of China or plan to do so in the next two to three years.9
In September 2020, research by Barclays Corporate Banking found that 27% of retailers were planning to switch to local suppliers;10 and in November, professional services firm Alvarez & Marsal said retail goods worth around $31.5bn would be onshored over the following 12 months across Europe.11
This means an increased need operationally for supplier management for both performance and risk -- plus onboarding, and ongoing management. And this extends to getting forward views on how the existing supply base could show procurement professionals where they need to expand that supply base.
Linked to this development is a finding that 90% of respondents admitted they couldn't see into the second tier of their supply chain which meant that many couldn’t see the supply problems that existed then and may still be coming. It is therefore critical that our visibility increases, which could easily mean we face a demand for more localized, visible supply chains and more services.
Region-specific shutdowns and supply disruptions
When the pandemic disrupted deliveries, it highlighted the issues in a complex global supply chain. In a separate McKinsey survey, 93 percent of procurement and supply-chain leaders said they planned to increase the resilience of their supply chains, and 44 percent said they would be willing to give up some short-term efficiencies to get it12—although this sort of trade-off can be avoided in some cases. The report identified key strategies include 40% near shoring and expanding supplier base; 47% increase in inventory of critical products; and 53% dual sourcing of raw materials. Building relationships with more diverse suppliers may help companies withstand further disruptions in supply availability.
Shifting market dynamics and value pools
The pandemic upended market dynamics and value pools in many industries. For example, value pools are expanding for tech companies with cloud-based platforms which help remote workers communicate and collaborate. And this is adding pressure to commercial real-estate markets and the airline industry. Decades-old paradigms are being upended. Ever-increasing global sourcing is now potentially giving way to regionalization of supply. Lean inventory targets are being reset in favor of higher buffer stock.
Shortages created by volatile demand
Early in the pandemic, demand for goods and services spiked but supply disruptions created shortages of consumer essentials such as toilet paper, bleach, and hand sanitizer. Now, as governments allocate resources to encourage infrastructure and residential projects, construction may see increased demand for selected types of services. Procurement leaders will need to collaborate even more closely with sales and demand-planning teams to anticipate and react to market shifts quickly.
Changing ways of working
Work from home was becoming popular even before the pandemic. Forced social distancing accelerated the reimagining of the workplace—and the switch to remote work—faster than almost anyone could have predicted. As with other departments, the shift changed how procurement operates. Team meetings, supplier site visits, negotiations, and other face-to-face interactions that procurement professionals took for granted went virtual or went away—all calling for a new way of working
So how does procurement stay in the room?
Risk – a more comprehensive view includes:
- assessing supply-chain risks thoroughly and manage them more holistically; and
- increasing transparency by working with suppliers to gain information about their next-tier suppliers and their upstream value chains. This would therefore help reduce the visibility gap into supply chains.
Business-continuity planning has taken on a new approach. As examples, new contingencies are now being designed, not just for a single supplier plant to go offline, but for entire countries to become inaccessible for the purpose of conducing simulations of possible supply-chain disruptions. The purpose is to uncover hidden vulnerabilities. Scenario planning is an essential tool to help drive these approaches.
Category Management – we must…
- revaluate individual spend categories to make the most of shifting market dynamics and address the risks posed by changing value dynamics; and
- minimize risk exposure by structuring contracts to build in performance incentives. For services this could mean moving from simple time and materials to fees for performance.
Subscription-based contracts that tie fees to usage or outcomes can improve performance and reduce upfront capital costs.
Connecting with partners that have an existing infrastructure or complementary service can make it faster and easier to adapt to a changing environment. In Australia, after the COVID-19 crisis, supermarkets needed extra personnel to handle a sudden surge in sales contracted with thousands of airline workers who had been sidelined when airlines downsized.
The pandemic made it necessary to rapidly adopt new ways of working which forced companies to accelerate the shift from manual to digital operations. As remote work becomes the next normal, digitization can be an important enabler of effective collaboration across functions. Deloitte stated that the companies who had moved quickest to digital were the ones who weathered the pandemic the best.13
Procurement departments need to transform how they operate and collaborate with internal and external stakeholders. Adopting an agile operating model could help procurement functions scale up or down quickly to respond to sudden supply challenges. Agile methods could be applied to key strategic issues, such as assigning a cross-functional “sprint team” to capture value faster within a specific spend category or create a “negotiation factory” to deliver contract negotiations in assembly-line fashion or onboard a new supplier more rapidly. But regardless, the days of 12-week sourcing cycles are probably over -- stakeholders will not tolerate it.
At the end of the day, regardless of obstacles, procurement can drive an organization’s pandemic recovery efforts. Forward-looking companies will go a step further and completely reimagine what the function looks like to enhance the value that it can deliver. Investing in stronger, future-ready practices and capabilities will pay off in the short term, and help organizations emerge stronger and become better prepared for any future crisis. This will help retain and attract more talented practitioners to join this new procurement quest and move procurement forward.
- Room where it happens is a song by Lin-Manuel Miranda - About the song.
- Procurement execs don’t see cost savings as No. 1 for bottom line, CSA, Dan Berthiaume – March 22, 2021 See also TealBook survey March 18, 2021
- McKinsey report Reimaging procurement for the next normal Aug 26, 2020
- For definitions, see Hotmath article by Varsity Tutors
- EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortization – “a measure of a company's overall financial performanceand is used as an alternative to net income in some circumstances.” From Investopedia
- McKinsey report Reimaging procurement for the next normal Aug 26, 2020
- See also Deloitte survey Re …COVID-19 shifts…from Save-to-transform to Save-to-thrive… Aug 18, 2020
- See also Hackett report – …Procurement’s Response to Pandemic Spend Cost Reductions… April 28, 2021
- Gartner press release June 24, 2020
- Barclays article: Survive and thrive: How the UK’s retailers are adapting to the ‘new normal’
- Retailers plan to onshore products worth $31.5 due to Covid, D&B Risk Analytics 13 November 2020
- McKinsey report Reimaging Industrial Supply Chains Aug 11, 2020
- Deloitte - A case of acute disruption – Digital transformation through the lens of COVID-19 - 6 Aug 2020
The opinions and views represented in this article are the authors alone, and do not constitute legal advice
ABOUT THE AUTHOR
Within SAP, Gordon’s role as APJ Intelligent Spend Evangelist aims to infuse procurement and finance thought leadership to 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, a council member for World Commerce and Contracting 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 a licensed SDI™ facilitator.
Content reflects views and opinions of the author and do not necessarily reflect the views and opinions of World Commerce & Contracting.