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Author's profile photo Gordon Donovan

The Procurement Monthly – October 2023

Each month ill be taking a look through the published reports, articles and whitepapers written about procurement and external workforce and drawing out the key parts and general themes.

Proxima Supply Chain Barometer

This is a 2000-person survey of CEO from the US & UK reflecting on decisions they have made and what th4ey see ahead. The context, of course, is the huge changes wrought from inflation and the decisions that have been made. But with markets stabilizing what lies ahead?

Some key takeaways:

51% of CEO said they expect to spend more time on supply chain issues in the next 12 months. 64% of them said that would be between 5-20% of their time.

34% stated that they had a formal plan for decarbonising their supply chains, 32% have begun strategic conversations with their suppliers. 33% of linked exec pay to sustainability targets. Main barriers are complexity (25%0 and cost (23%)

90% stated that supply chain resilience is a challenge and 43% have begun on/nearshoring parts of their supply chain. 69% stated they have concerns about potential for human rights issues in their supply chains.

Overall, a worthwhile read, its interesting that its CEO’s as well, this links well to the NC state research previously covered that identified the its CEO that “owned sustainability”

 

AQPC Procure to Pay Governance & AQPC Sourcing Transparency

Couple of reports from AQPC this month. In the first blog, APQC has gathered insight into how organizations are governing and managing their procure-to-pay (P2P) processes. A quick look at how P2P is being governed reveals a lack of integration between procurement and accounts payable (AP) in 70 percent of organizations.

 

Key Data Points from Organizations that Lack Procurement and Accounts Payable Integration

  • In 28 percent of organizations, Procurement and AP are separate teams with separate reporting lines.
  • In 42 percent of organizations, the two functions are separate teams that at least report to the same c-suite executive.
  • Only 30 percent of organizations report having an integrated procure-to-pay team reporting to one executive.

When the P2P process is disconnected it can have a negative impact on suppliers (as well as internal cashflow). The impact of supplier risk for organisations has risen to the surface more prominently in the last 12 months than before, and this blog suggests that one solution is to implement a global process owner. The owner should have an end-to-end view of the whole process. The main takeaway being that to focus on effectively managing the end-to-end process, organizations need to shift from thinking of procurement and AP as separate processes and implement governance that enables them to become an integrated, seamless end-to-end process.

In the second AQPC report this was a survey of 185 participants done with BCG discussing transparency into suppliers, locations and the risk management strategies being followed. Some interesting points made included:

37% Deploy multi-sourcing across all categories and recovery strategies for single-sourced categories.

25% Identify critical sub-categories to deploy multi-sourcing strategy and rapid recovery for single-sourced items.

20%-Tiered, multi-sourcing strategies for different sub-categories and well-defined recovery strategies for single-sourced items across the full bill-of-materials

Whilst only 18% didn’t have ,multi-source strategies in place, its clear that these strategies are gaining traction.

It was interesting that from a supplier selection perspective, how much was location of supplier a factor. Its pretty evenly split, 26% pure cost focussed, 29% focuses on high-risk locations, ad hoc, 24% it’s a key factor, & 21% cross functional strategic approach.

MIT Automated Negotiations

In many ways this article and the Scanmarket E-Auction report could be read together. The MIT papers, details the benefits organizations have derived from automated negotiations, what it takes to persuade stakeholders to use the technology, and how to incorporate automation into your procurement processes.

The article is well researched and written and cites a number of examples of how organisations such as Google, Maersk and Walmart have been using automated negotiations (or E auctions) in their process, and details the categories that they have used them for, both goods and services (including media and marketing agency) An example given was of Walmart having upto 150 suppliers participating simultaneously conducting multiple rounds of negotiation….. in 2 hours

The paper in summarising this stated that automating negotiations dramatically increases the number of suppliers and negotiation rounds that a company can include in a significantly shorter period of time.

“It’s the speed of e-auction execution that drives value,”

Kees Bressers, head of procurement at Walker’s Shortbread.

Companies that have scaled their automated negotiations have matched the procurement strategy for a particular spending category and market conditions with the best automation processes and tools.

The paper then defines 6 key practices to overcome resistance and deliver value.

  • Mandate consideration not use.
  • Make Success visible.
  • Prequalify suppliers.
  • Treat non incumbent suppliers fairly.
  • Unleash AI to improve deals with tail suppliers.
  • Create a formal support structure.

Scanmarket E- Auction

Hot on the heals of the above research paper, here’s what’s been delivered by Scanmarket! This is a quarterly paper that looks at the numbers and results of auctions held. The report stated that he number of executed e-Auction events in Q2 increased to a significant 39.18% when compared to Q1. This rise suggests e-Auction adoption is trending favourably as a recognized reliable and effective means to save across various categories. Q2 2023 presented a staggering 11.32% in average savings, moving just slightly higher than that of Q1’s 11.31%.

Interestingly the most auctioned category was services.

State of Supplier Diversity 2023

The annual report from Supplier .IO is out, there was a webinar which was co delivered with Chris Sawchuk of the Hackett group.

Of the information that was included, 60% of respondents (216) have a formal program, with 44% being under 2 years old. The main drivers of diversity are alignment and to improve competitiveness within the supply chain. Interestingly compliance ranked as the lowest quoted driver, which conflicts with other reports recently released (Deloitte CPO report for one)

Data quality saw the biggest improvements this year, closely followed by program processes with workload, accuracy of data and proving accuracy to leadership as the three top barriers.

2/3 use 3rd parties’ data to monitor diversity status of suppliers which moved it up 2 spots to the top way that companies track status and over half (57% integrate diversity metrics into their S2P systems.

Standard and Poors PMI Index

Last month I reviewed the supply chain volatility index, this month it’s a Purchasing Manager Index(PMI) ! S&P put out a monthly bulletin that tracks the changes in PMI, which is a measure of confidence in the global economies. Over 50 is good, under 50 is bad!

This month its 50.6 but the trend is downwards, for the last quarter, suggesting some economic headwinds ahead. In fact this is the lowest level since February (when it went back above 50). Its always useful to look at these types of indices to see how the global markets are trending, to consider when thinking of strategies.

The key takeaways from the PMI are:

1) Convergence observed in August with a slower fall in manufacturing output paired with weaker services activity growth, leading to a weaker overall global growth momentum.

2) Selling price inflation eased, albeit only slightly, suggesting that inflation remains sticky.

3) Softening demand conditions and falling backlogs bodes ill for output in the coming months, though overall sentiment improved, driven by improved services optimism.

McKinsey How Medium size business can better manage sourcing

While large companies can usually drive procurement cost savings with relative ease, small and medium-size enterprises (SMEs) typically lack the necessary scale despite being the backbone of many economies around the world. The article suggests the following are typically what prevents SME from achieving value in procurement:

  • A lack of spending transparency
  • A myopic focus on the short term
  • Talent gaps
  • Underused digital tools and automation.
  • Exclusion of procurement and supply chain in business decisions

 

The article suggests that an interconnected series of 5 strategies will help SME achieve value. It states that only all 5 (ie not one alone) will be needed to drive the value that larger enterprises achieve.

  • Establishing a CoE
  • Improving forecasting
  • Expanding use of digital procurement tools
  • Gaining greater market intelligence
  • Incorporating supplier-driven product improvements

McKinsey – New ERA for procurement

And my read of the month is this one!

The world has experienced significant turmoil over the last 3 years, and whilst the results of this turmoil have shifted where and how people work and live a new volatile environment faces many businesses. To succeed companies, need to embed agility, technology and innovation, but above all, according to the article, their long-term success depends on a much less obvious action: changing what the organization buys, whether it’s raw materials that meet new environmental standards or analytics talent who can identify what consumers most value.

These days, to perform well, companies need a different end-to-end view on the business. Procurement is absolutely critical.

CEO Chemicals Business

The article states that 4 megatrends will shape the future of procurement.

An increasingly multipolar world that challenges the interconnectedness of global value chains. Procurement leaders are therefore shifting focus from cost improvement alone toward resiliency and assistance to businesses that are adapting to volatile market conditions.

Advances in AI and machine learning that can quickly extract deep insights from previously unstructured data. Procurement can make a crucial contribution by enhancing spend transparency and capitalizing on movements in supply markets.

Demographic shifts, including shrinking workforces and rising skill gaps, that intensify competition for digital talent. The task for procurement departments is to attract and nurture candidates with the analytical skills and data competence needed to unlock value from agile ways of working and digital operating models.

The transition to low-carbon energy, upending resource and energy systems. Procurement can take the lead in minimizing value chain emissions, securing high-demand green materials, and managing the capital expenditure required to achieve net zero.

For procurement to remain as essential as they are, new “currencies of procurement” beyond traditional cost savings can help position procurement as a strategic function, in fact these should serve as the guide for procurement to 2030.

Improving net margin by outperforming the market: In a more volatile era, value creation increasingly depends on offsetting market increases and swiftly capturing downward trends. Collaboration between procurement and sales, along with other functions, becomes vital for protecting and increasing margins while managing risk.

Ensuring volume and enhancing growth: Procurement can surpass mere order fulfillment and instead provide a more durable competitive advantage, strategically securing critical and scarce materials while maintaining supply chain flexibility.

Leading value-chain emissions reduction: Procurement can contribute critical support for net-zero objectives by securing green materials and decarbonizing the supply base through localization efforts and enhanced supplier co-innovation.

 

The full paper is worthy of your time to read fully, I particularly liked the evolution of operating models, to agile teams (or I have also heard them called sourcing squads) as opposed to static category managers, which goes to some of the points above, about breaking out of the silo of categories. Whether 2030 is realistic, well I guess we will find that out in the next 7 years!

 

If you require more info or want to discuss further, please reach out!

 

 

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