Rethinking Procurement for the new normal
Why is this the case?
In most cases the lead time of IT-based digitization projects is too long for a global company and many companies still underestimate the advantages that automation and reorganization of established organizational structures and processes can bring. Deploying a cloud solution for outsourcing certain processes or using networks to connect to a whole pool of potential suppliers can bring the costs down and provides more flexibility and transparency. However, certain improvements are leading to new set of challenges. At the end all the above-mentioned digitalization initiatives need to follow a coherent vision to strengthen the overall mid-and long-term agenda.
That’s why: Digital Change is not only desirable – it is inevitable.
New crisis, new challenge:
While procurement can again play a crucial role in recovering from a crisis, nowadays procurement leaders have to take a different approach to the function in addressing a range of new issues. Back then, 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 the added challenges of shifting supply-market dynamics, changing ways of working, increasingly volatile demand, and de-risking their supply chain to make it less vulnerable to disruption.
In the following, we want address and highlight:
What are the crucial topics companies and industries were confronted with in 2020?
How do they get through the pandemic and the disruption of the global markets?
As with every disruption and new circumstances, there is the chance to invent something new and an opportunity to reinvent oneself. This effect was noticeable during the unforeseen lockdown of COVID-19, were various market shocks, crises and medical emergencies shocked the world and confronted companies with enormous tasks to overcome unforeseen and enormous challenges.
The figure below summarizes the effects and their impact on companies (that participated in a survey) according to their weight. (see: Reimagine procurement – McKinsey)
1. Team matters – new ways of working:
- Most critical success factors for procurement organizations to navigate the pandemic revolve around employees and teams, including workforce safety ad effective virtual working.
- It can be seen in recent studies that 80% of organizations have identified the well-being of their workers as “important” or “very important” in order to be successful in the next 12-18 months. (see Deloitte CPO Flash Survey)
- Leaders in the company need to train & equip their teams to manage in this new world and must also foster a culture that empowers and supports employees to be their best while working remotely.
First steps to reimagine:
- Adopt agile methods, enabling teams to respond quickly to changing goals and circumstances
- Build capabilities needed to work in new ways
- Leverage digital and analytical tools to best relieve employees from manual, repetitive and time-consuming tasks. For example, using internal/external collaboration tools to better channel the communication, using prepacked & user-friendly reports to prevent manual and complicated excel reports.
2. Cash is king:
- According to recent surveys two in three companies globally pursue cost reduction efforts over the next 12 months, compared with 38 % before the pandemic. This shows that cost & cash flow management is of top importance for CPO´s right now. Important and already planned IT Projects have been cancelled or discontinued to focus on short term savings. (see Deloitte CPO Flash Survey)
First steps to reimagine:
- Accelerate digital and analytics adoption in the procurement department
- Leverage spend analytics to build competitive advantage and counter margin pressures
- With IT projects: Focus on short term goals and leverage quick wins while taking incremental steps to the bigger picture – for example automate invoice processing to prevent manual tasks and high errors with the cash flow is secured and the employees can focus on higher value tasks.
3. Supply Chain resilience
- As can be seen in a recent study from Deloitte, 40 % of Procurement & Supply Chain leaders said that the top ranked strategies had been short-term and tactical driven – this has led to activating alternatives sources of supply, increasing inventory levels, or injecting capital into their supply chain to quickly respond to supply disruption. Also, it has been stated that only 50 % of procurement organizations had high or very high visibility into their tier 1 suppliers, while 90 % of organizations rated visibility into their extended supply networks as moderate to very low.
First steps to reimagine and best strengthen and support the supply base:
- Build transparency into the supply chain beyond Tier-1 suppliers
- If necessary, automate, expand and revise your risk framework – for example connect to supplier network and digitize your communication and document exchange
- Find alternative source of supply, consider switching to local supplier if it is operationally and socially feasible
- Conduct stress test – war game like simulations of possible supplier chain disruptions can help to uncover hidden vulnerabilities
As we have seen in the pandemic, companies with a high standard of digitalization and agile processes have managed to get through the disruption quite well. Undoubtedly, the best and most flexible degree of digitalization is of no use if you have to strictly adhere to legal requirements in your industry and have little room for maneuver. However, it shows once again how important the discussion about more digitalization and automation is in order to be able to make the best possible decisions quickly – you don’t want to be late to the party, the next disruption will follow.
Here, SAP offers a perfect environment and set up for every company and industry to support them to further develop and enhance their processes at their own pace. Particularly, we want to draw the attention to the new strategy of networks, which SAP announced this year (more details here). As we have seen best during the crisis, business does not only take place in one place but is global and connected. Those who use a broad and deep B2B network have clear advantages, planning security and the ability to react agilely to unforeseeable situations.
Don’t hesitate to contact us if you want to start your procurement transformation to be ready for the new normal. We´re in it together!
Further read and sources: