This post series takes a look at tackling disruption from procurement perspective. I first review why procurement has become so important for company performance and what changes in the market environment have contributed to elevating the role of procurement within companies. After this, I will focus on three domains – strategies, technologies and talent – which I believe procurement leaders and managers need to consider when trying to find ways to manage disruption.
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Due to increasing focus on core competencies and the development of global markets, companies have outsourced their processes and operations such as manufacturing and logistics at breakneck speed. Indeed, outsourcing has become a key strategy to create value for shareholders, who have rewarded companies that have asset-light business models. Today, external spend can account for as much as 60-80 % of company turnover, meaning that the ways suppliers and service providers run their business has a substantial impact on buyer company profitability. Companies have become dependent on their suppliers, meaning that shocks and disruptions –shortage of components and raw materials or delays in manufacturing and logistics – that happen upstream have a profound effect on the ability to fulfill customer orders. The impact of supply chain disruptions is exacerbated by the fact that traditionally companies have had poor visibility beyond their 1st tier suppliers. Also, due to cost and efficiency pressures, companies have stripped down their inventories and optimized the supply base, meaning that there is very little slack or redundancy in the supply chain. This makes companies more vulnerable (Fiksel et al., 2015).
Early 2022, companies were just coming to grips with the impact of COVID-19 pandemic on their supply, when a conflict emerged in Eastern Europe. The shockwaves were quickly felt on the global marketplace through rising energy and input prices, shortage of supply and disrupted logistics chains. Companies are faced with new sources of uncertainty at a time when their supply base and supply chains are already strained.
Global volatility accentuates the importance of having visibility beyond direct suppliers, anticipating disruption and taking actions to reduce supply market and supply chain related risks. In a way, this is old news. Keeping the finger on the pulse of supply markets and securing supply has been an essential part of category and supply chain managers’ jobs even pre- COVID times. Nevertheless, research on procurement trends by SAP and Oxford Economics (2021) shows that there is room for improvement. Consider the following findings:
- More than half of the 1,000 surveyed procurement and supply chain executives were experiencing a single-source situation for one or more commodities
- Only half were able to find alternative sources of supply quickly
- Less than one third of the executives regarded their risk management practices as effective
- More than half were struggling with inventory visibility
The findings indicate that companies have substantial vulnerabilities in their upstream operations. A supply management practice which is seen as an asset at times of stability - such as a reducing the number of suppliers for certain commodities or services – may become a liability when disruption hits. With complex, connected and global supply markets, companies are increasingly faced with the challenge of how to tackle disruption and keep the business running.
There are no quick fixes to battling disruption, and changes in the business environment may outpace the company’s ability to respond. I believe that procurement leaders and managers can prepare for and tackle supply market disruptions by revising strategies, rethinking the role of technologies and reinforcing talent in procurement. In the next chapter of this series, we will focus on revising strategies.
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Sources:
Fiksel, Joseph et al. 2015. “From Risk to Resilience: Learning to Deal With Disruption”. https://sloanreview.mit.edu/article/from-risk-to-resilience-learning-to-deal-with-disruption/.
Getting closer to see further 2021. Agile Procurement Insights Report by SAP and Oxford Economics. Accessible at: https://www.ariba.com/resources/library/library-pages/getting-closer-to-see-further. Published: February 23, 2021. Retrieved: June 13, 2022.
Disclaimer: This blog post bases on the writer's own insights.
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