The Procurement Monthly – September 2023
Each month ill be reviewing research papers, articles and white papers written about procurement and external workforce, summarising them and identifying key takeaways. All opinions are my own!
Organisations are looking for ways to increase trust in the supply chain as a way to manage the volatile environments they are trying to navigate. This article (and survey) looks at the areas that organisations are struggling with, and how they are trying to manage the situation.
For leaders of large, complex supply chain networks, the seismic challenges from the COVID-19 pandemic may have eased, but for many, significant challenges remain. Having worked so hard to weather the storms of this decade, an important question remains: How do you continue to earn or rebuild stakeholders’ trust in your supply chain in this uncertain environment? The report points to several critical factors, including investing in technology to better forecast demand and drive visibility, and aligning with customer and employee values.
While bottlenecks may have improved, continuous supply chain volatility is expected. When Deloitte surveyed more than 1,000 executives from large global organizations operating complex supply chains, they found supply chain disruptions are ubiquitous, as 77% acknowledged experiencing an adverse supply chain event in the last 12 months. Further, almost half of global supply chain executives (44%) expect more shocks in the coming 24 months. And this likely understates the true risk. The primary challenges that executives are planning for in the next 12 months include price volatility, inflation, resource shortages (labour and materials), and geopolitical instability.
Notably, these findings are relatively consistent for organizations operating supply chains across the North American, European, and Asia Pacific regions. While companies in Europe, Middle East, and Africa (EMEA) are more likely to cite geopolitical instability as a top challenge, price volatility and inflation are top concerns across global regions.
Generating trust in the supply chain has been identified by many studies (including one from the University of Tennessee as being critical to managing volatility in supply chains.
The study then performs a series of analysis to identify improving trust with improving relationships and performance and suggest that “an intentional focus on trust can help supply chain leaders better understand stakeholders’ needs and prepare their organizations to develop and implement the initiatives that will generate the greatest impact and value over time.”
This whitepaper followed an AoP live event and gives a good summary of the different ypes of operating models, and how they can drive changes needed for any transformation. The paper covers the three most popular (Centralised, decentralised and centre led) and gives good summaries of each together with pros and cons. The paper states that “Choosing the right operating model for the business is a nuanced and strategic decision that should consider multiple factors, goals, challenges, and even the company’s culture”.
The paper then goes onto discuss a procurement Centre of Excellence (CoE), something that I think is becoming more prevalent especially as technology is allowing procurement activity to be done close to the point of need but as the paper states can fit within any of the main operating models. The CoE will drive market intelligence, category management and process improvement, as well as taking a holistic view of the data and helping to inform overarching strategy.
A busy month for the AoP team (!) as 2 other papers both around spend visibility/analysis were published. Spend analysis you may recall was the primary driver of digitisation in procurement as identified by Economist Impact study, so the topic is very relevant.
He first paper looks at the importance of spend visibility and analysis and the criticality of aligning to corporate vision. He second paper looks at complex spend categories, offers some suggestions for how to segment and therefore identify complexity.
Besides the information in both the case studies are where some great ideas live, from waste management, packaging, food production, media and creative, highly regulated and manufacturing environments.
Last month I reviewed a report by Procurious where one line stood out that nearly 80% of procurement stakeholders did not trust the data. These reports make similar points, that unless the data can be trusted procurement won’t make the business alignment it seeks.
The hype cycle, which is available to download from a number of different vendors, was released recently, and its interesting to note the changes from 2022 -to 2023.
Unsurprisingly, Generative AI makes an appearance at the early stage with an expected time to mature of 2-5 years, and conversational AI rises the innovation trigger stage to the “peak of inflated expectations)
As you’d expect, Predictive analytics, and supplier sustainability solutions have moved further up past the innovation trigger to the top of inflated expectations (in fact conversational AQI and supplier sustainability are starting down that slope, so expect expectations to be tempered somewhat.
Becoming more mature now, moves external workforce, AP invoice management and RPA suggesting that expectations are being met, and they are being more adopted. Leaving the hype cycle are freelancer management, (potentially being included now in the HR hype cycle and smart contracts, as Gartner stated that interest from procurement organisations was limited.
This paper looks primarily at the issues surrounding whether procurement can focus on broader objectives other than cost management.
“I might be able to get away with not having made advancements in sustainability, but I cannot afford to miss my cost savings targets. It comes down to what we can get away with and what we are held accountable for it”
CPO, pharmaceutical company
Whilst clearly procurements agenda and workload is broader, many of the objectives and measures are still primarily linked to cost management. This was also identified in the Economist Impact survey where cost management was the overwhelming main value area of procurement (more so for rest of business than CPO).
The opening identifies that 70% of procurement leaders thought their biggest impact was on cost savings over the last 3 years, where sustainability is at 23%, and 93% stated that delivering cost savings, and 82% identified cost avoidance as having metrics attached to them. What is more promising is that Improving sustainability was third with 73% stating that metrics were attached to that objective.
The risk here is that as disruption and inflation begin to ease, however, CPOs find themselves at an inflection point. Does the function return quietly to the back office? A Gartner poll suggests that may be the view of leaders in other parts of the business as the perceptions of supply chain teams as a strategically important function peaked at 56% in 2020 but have since dropped to 47% – lower than where it was in 2019 (49%).
This study was commissioned by Ivalua and covers 470 procurement responses; however, some are at lower levels that CPO/level 1.
An interesting read from Forrester on behalf of Ivalua, This study explores how the procurement function can become more agile and help organizations adapt to any changes in the market or business environment with some interesting takeaways:
Procurement has competing priorities that create challenges. To ensure supply continuity, 76% of respondents compromised on supplier due diligence and 73% compromised on other objectives. Which may help explain that according to the report procurement is looking to technology to look at supplier risk and performance management solutions to help manage that issue.
It was great to read that Seventy-eight percent collaborated more with suppliers today than three years ago and 50% increased collaboration/info sharing with suppliers. As per the Deloitte report reviewed earlier, and the university of Tennessee report this drive for collaboration, and recognition of becoming a customer of choice is crucial for buying teams to manage the volatility that many experience.
As per the Economist impact report, Supplier visibility was identified as a key goal and 69% of respondents identified that they will increase this. It was also interesting to see that csash flow management (as also identified in a Mckinsey CFO survey later) was also a topic of interest for organisations, which I think gives procurement an opportunity to align with treasury.
Risk was a key area looked at in this report and nearly half od respondents stated that they had diversified their supplier base to minimise disruption (although the over 3/4 that compromised on due diligence is a concern)
Data was identified as a barrier for many, with having access to ad consolidating identified as a primary challenge for many to solve to increase their effectiveness.
McKinsey produced 2 interesting studies this month, the first on Generative Ai is very interesting as a background to the larger use cases. According to the survey, whilst marketing and sales were the functions largely using AI, Supply chain and procurement has some use cases as well, in fact respondents identified reducing costs in core business as a core activity of generative AI. Y far the biggest expectations from organisations, was the impact from AI on workforce size. 43% of respondents to a 1600+ survey suggested that upto 20% of workforce would need to be reskilled over the next 3 years. Within procurement & supply chain, 45% of respondents expected the workforce to decrease in size over the next 3 years due to AI.
The second study was a CFO survey. This study identified that economic volatility, inflation and weakening demand were the biggest risks to their company’s growth, (noticeably rising interest rates decreased in importance) and that raising prices and reducing exposure to fixed costs were primary strategies of organisations. I did note however working capital being identified as a third strategy, and this was also mentioned in earlier reports.
With all the talk about volatility there was an interesting article in supply management about the status of supply chains. Global excess supply chain capacity has grown as low demand conditions, driven by economic turmoil, have left suppliers without orders and warehouses without stock.
During the pandemic and the resultant scarcity crises, safety stockpiles of goods were built up, these have now fallen below the long-run average last month, while reports of item scarcity are now in line with historically normal levels according to the GEP volatility index. The index fell to -0.50 in July, from -0.26 in June, indicating an “accelerated rise in excess capacity”.
Excess capacity in supply chains is at high levels compared to recent years, so both the article and various reports all suggest now is a good time to be renegotiating!
This was a supply management/Ecovadis study that looked at how ready organisations were for the current and upcoming legislation.
When it comes to preparedness, participants were asked to share how ready their organisations were to address new or proposed regulation that most affects them. Less than a quarter were confident that they were equipped, around half were partly, and the over 20% were fully ready.
It was interesting that organisations from different regions were anticipating the impact of regulations not from within their home country, so the impact of these regulations are having far reaching consequences.
“While sustainability risk management is not new, the survey results show that today’s challenges require a new response.”
Reasons for the lack of preparedness include resources, data, awareness and engagement with suppliers, and internal stakeholders. There are some good examples of how organisations are preparing, including mapping stakeholders, jointly building business cases and then a constancy of communication.
Many companies have incorporated ESG criteria into their procurement processes, covering human rights, decarbonisation, and ethics nd many are also planning to invest in technology around due diligence, and risk mapping.
This is a survey of 750 supply chain leaders from the US and Europe. There’s so many interesting parts to this report, but let’s look at the key findings, that on average organisations suffer 4 disruptions per year, that’s up from 3 last year but what’s interesting to me is that the report states that organisations only assess just over half their critical suppliers for risk, and that over 90% wouldn’t be aware of the disruption in all/any of their tiers of the supply chain within 48 hours.
Which brings us to Supply Chain Visibility, which has been mentioned several times already in this blog. It has improved since last year’s report, but still not where you’d want it to be,27% have good visibility into tier 3 now especially when you see where the origins of disruptions emerge which is tier 3 and beyond.
The good news is that most companies know they aren’t there yet, and that 75% state that especially with all the emerging regs that we just discussed they can’t comply without data, analytics and risk management software.
“At a global level we haven’t done a good job managing risk. We assumed everything would work flawlessly. And now we know it doesn’t.”
These risks cost organisations losses ranging from $43 million to $47 million in each of six distinct risk categories:
- Financial, including supplier health and insolvency
- Catastrophic, including extreme weather, natural disasters and factory fires
- Geopolitical, including wars, terrorist attacks and global trade disputes
- Cyber, including data breaches, ransomware demands and attacks on critical physical and digital infrastructure
- ESG, including environmental factors such as carbon emissions and pollution, plus social factors such as forced and child labour
- Restrictions, including sanctions and export controls imposed on named entities, individuals, and technologies
Overall this report (like last years) is an informative read covering
The report also looks at the top risks, that procurement leaders are concerned about, which is similar to the list form Deloitte earlier (Supply, inflation etc) but also identifies cyber risks in the top 3. Similar to the Ecovadis, it identifies that legislation will have a material impact for organisations and are a top risk (i.e. being compliant to legislation) and like Ecovadis report also states that legislation is helpful for CPO to improve TPRM capabilities.
The Economist – Building Bridges. Supplier management
This reports builds from the Economist survey earlier this year of 500 C suite leaders, taking a look at the how companies are managing their suppliers amid the backdrop of recent global challenges and economic uncertainty. Whilst the respondents recognise the role procurement plays, the survey also turned up that nearly 40% identified that there was room for improvement in the way that supplier relationships and performance is managed.
The paper identifies that limited visibility into the supply chain will hamper organisations as they seek to build relationships, and that technology has a real role to play in helping. It’s a balanced paper, written using the data from the survey and some key subject matter experts and practitioners.
Please reach out if you wanted more information, or ill be interested to hear your views on any of these papers!