Staying the course in digital transformation: A must for procurement in manufacturing (and other sectors!) In this article, JAGGAER identifies the main challenges for procurement and shows how you can confront them.
Let’s start with a painful truth (more painful for some than for others). We have seen that the way we manage commerce, and the economy is more fragile than we thought just a few years ago. Business models, processes, and supply chains largely functioned normally so long as there were no major geopolitical or societal upsets “out there.” Bad weather? We can take that into account. New customs regulations? Foreseeable. Civil unrest in a distant land? It happens, but there are ways around it. These minor dilemmas in the day-to-day operations of procurement did little to disturb embedded processes in manufacturing companies.
But in 2022, several factors converged to create intense pressure and a series of crisis scenarios: After a price peak in September 2021, container prices remained at an immensely high level for a long time in the following year. Ships were unable to leave ports, inflation and recession put pressure on the markets and many established transport routes disappeared. Furthermore, energy prices made production barely profitable in some cases, if at all. The persistence of COVID in parts of the world, notably China. Including the war in Ukraine and dozens of other challenges for companies and the global economy. So, what’s next for manufacturers and companies in 2023?
Challenge # 1: The relationship between cost and risk has changed
The age-old mantra that you should consolidate spend with a single supplier to drive down cost has become a thing of the past. The negative influence on risk management is now simply too great. Many companies have said goodbye to single sourcing and are relying more than ever on a multi-sourcing strategy to significantly strengthen their own resilience. They re-sorted, rethought and disengaged from emerging or potential supply chain issues in 2022 – at least on a conceptual level or on a small scale. In 2023, the task for procurement organizations is now to translate this discovery phase into reality and bring it into the breadth of their own procurement.
Challenge #2: With rising demand for locally sourced products, their prices will also rise
Energy shortages in the EU and ongoing COVID-19 outbreaks in China are causing factories to shut down and you may scramble to find suitable alternatives. The Harvard Business Review recently commented that the “era of far-flung global supply chains, is probably over” and that manufacturers are moving to a regional sourcing and production model. Some call this development “deglobalization.” In our view, that’s not really the case.
In principle, companies are bringing some suppliers of primary products geographically closer to their operational locations – but the globally oriented way of thinking and acting remains. Since many manufacturing companies would like to expand such a regional model, it is important to act quickly with those new suppliers. Many competitors are currently looking for suitable suppliers in the geographically closer vicinity, which means demand is rising there and with it, prices. It is therefore important to secure quotas at an early stage.
Challenge #3: Local suppliers are under price pressures
It appears that just as suppliers can handle one cost issue, such as the truck driver shortage in Europe, another one arises, like the surging energy costs. As a result, some industries are unable to operate profitably or must raise their prices for new orders. They are walking a tightrope between current prices and the risk that their production costs may look completely different four weeks after their offer has been accepted.
This in turn presents a risk to their customers in procurement organizations. Do we get tough on pricing or would that risk putting our suppliers, or our suppliers’ suppliers, out of business? There is always an answer to such a question, but we need to be able to quantify the costs and risks.
Challenge #4: To make better decisions, you need transparency
If you want to make valid decisions as a company and purchaser in this mixed situation, you need one thing above all else – transparency. This transparency can only be achieved with the right data. To be more precise, “data-based transparency.” Organizations will also have to deal with disruptions and bottlenecks in the supply chain in 2023. When and where will they occur? What will be the impact? What are the alternatives?
Knowledge is the basis for clear decision-making on supplier management, from the verification of quality certificates to visibility over spend and alternative sources of supply. However, procurement processes have generally become so complex that they escape human oversight. Digital transformation is therefore a precondition for full transparency.
Challenge #5: Leveraging technology in an inflationary environment
Inflation is impacting many parts of the supply chain – the costs of production and logistics as well as raw materials, energy and transportation. Software applications can help to improve planning in this inflationary environment, as well as anticipating disruptions. What will be the impact of rising costs on demand? How much of the additional costs can we pass on to customers, and how much can we absorb? To what extent must we adjust the volumes of materials and components we buy?
In 2023 more than ever, manufacturing companies will need to harmonize all participants in their supply chains and achieve cross-functional collaboration around issues such as demand forecasting in order to make their own procurement processes more targeted, more detailed, and more agile.
Challenge #6: Cutting costs to reduce pressure on margins
Where cost pressure arises, “adjusting screws” are needed to alleviate it. For example, a design-to-cost (DTC) methodology can be applied, which allows costs to be considered throughout the entire new product development process. This can save 15-40% of product development time and material costs. However, this requires seamless collaboration and information sharing between all teams in product development. For its part, if procurement is involved early on in DTC, (i.e., the design phase), it can make an important contribution to material availability or stable supply chains.
Challenge #7: Scenario planning with the digital factory
In many areas, there are already so-called “digital twins” – digital images of a real situation that can be used to run through “what if” scenarios. For the evaluation of design and manufacturing alternatives, some manufacturers are already working with digital factories, (i.e., a digital image of a physical factory). Such a digital factory contains all the key elements that you’d encounter if you entered a production facility in real life – including thousands of different machines and material types as well as labor costs.
This allows manufacturers to simulate feasibility analysis, process optimization and cost feedback to optimize their real-world production, reduce changes and get products to market faster. Procurement teams, in turn, also use such digital factories to compare production environments based on manufacturing criteria to determine site or supplier selection and production costs. This can make production more cost-effective, faster and more flexible.
Challenge #8: Centralized information for centralized processes
The more you diversify your supplier base the more important it is to centralize and consolidate data management – otherwise you not only forego important efficiencies (you run the risk of introducing new inefficiencies). This is an important concept to understand and is crucial when you are searching for new suppliers, renegotiating agreements, or trying to secure limited supplies in important categories during times of shortage. In 2023, companies will increasingly have to manage these and other processes centrally and digitally in order to be able to sustain and extend competitiveness.
Challenge #9: Supply chain due diligence and ESG
The German Supply Chain Due Diligence Law came into effect on January 1st. In 2023, the EU will be drafting legislation to ensure that companies operating or doing business elsewhere in Europe also take action to ensure there is no abuse of human rights or the environment in their supply chains.
Legislation aside, manufacturing organizations are under increasing pressure from end-customers to ensure that they source ethically. Complying with such legislation and consumer pressure can only be achieved digitally. This is because the flood of issues and risks can no longer be controlled manually – and legislators are likely to promote or prohibit certain patterns of behavior in the future.
However, forward-thinking companies are already making sustainability a key business focus. In doing so, they are linking their environmental, social and governance (ESG) commitments to measurable targets in procurement, information technology, manufacturing and other operations.
Challenge #10: Dematerialization and decarbonization
We are undergoing fundamental societal changes on a scale we have not seen for decades, driven as much by technological change as by climate issues and the reality of finite material resources. The concept of dematerialization will impact procurement on two fronts. In terms of its own processes, we expect the further elimination of remaining paper-based processes in 2023.
In terms of production, electronic and digital services are increasingly displacing the manufacture of physical goods. As an obvious example, fewer and fewer CDs and DVDs are sold, with people transitioning to streaming services. This trend will further reshape procurement. The much-discussed process of decarbonization presents an exciting challenge and multi-billion-dollar opportunities.
As the cost of renewable energy drops further and society legislates in pursuit of climate goals, low-emissions products and processes will steadily replace established high-emissions ones. This entails yet more disruption to business-as-usual but in 2023, organizations need to get ahead of the curve on this transition – they will find that the financial rewards outweigh the risks. Procurement will of course play a central role in this transition.
The red thread
Astute readers will have noticed a red thread running through all the above information. Data, information, insight, knowledge, quantification and in summary – “intelligence.”
Procurement increasingly relies on intelligent systems to take many of the tactical decisions autonomously and to support humans in making the strategic decisions. This is precisely what JAGGAER means by Autonomous Commerce. Now is the time to invest in it not only to solve the challenges listed above but to provide the springboard for success as the economic climate improves.
Now online: A checklist for meeting your challenges
You will need to confront many of these challenges over the next 12 months – but how? JAGGAER provides you with practical answers. Feel free to download our checklist, which will help you position your purchasing even better for 2023.
