Supply Chain Visibility: By Getting the Bigger Picture, We Can Reward Innovation and Success

This is the first in a three-part series dealing with points raised in a roundtable discussion on supply chain visibility hosted by JAGGAER earlier in the year, with the participation of procurement leaders from several industry sectors.

One of the lessons of the pandemic for procurement is the value of being able to make quick decisions, reacting at speed in a way that we were less able to in the past. Procurement teams exhibited plenty of boldness and resilience, and this earned respect and recognition of the value we can add, as opposed to simply managing costs.

Having said that, the pandemic is only one of many different disruptions that we’ve had to endure and that we will continue to endure. The Suez Canal blockage alone disrupted about 16% of global trade, which amounts to billions of dollars every day. We’ll also have continuous issues with Brexit, trade wars, natural disasters and the disruptions caused by climate change. And, sad to say, we may soon face another pandemic.

Before the pandemic hit, another issue had moved up the agenda: corporate social responsibility. End customers want to know where the goods they buy are produced and under what conditions, and how. If they don’t like the answer to that question, your brand reputation will suffer, and customers will stop buying your products. For a variety of reasons, we can expect CSR to become an even more significant factor in procurement in the coming years.

The Pillars of the Procurement Function

At board level therefore, business leaders want to hear about mitigation of supply chain risk, sustainability, and addressing their CSR agenda. If you don’t have a contribution on these issues, you probably will not be invited into the discussion. All of which means there are now three pillars to the procurement function, where in the past, there was just one. That’s to say, you now have your day-to-day business as usual job of buying effectively to manage costs. But you can add to that supply chain risk mitigation, and then the CSR, sustainability, supplier diversity and environmental, social and governance (ESG) agenda – all of which I would summarize as bringing good business into alignment with doing the right thing.

A lot of this falls upon procurement, but that’s no bad thing – in fact, it’s a great opportunity. We need and deserve a seat at the table for all big decisions. And to be able to respond to the demands of the business we need to make the procurement function more agile and, at the same time, more resilient. We need to be better able to predict disruptive events and manage ways around them.

Procurement practitioners who attended a recent roundtable that we hosted said that they regard recent disruptions in terms of a macro trade risk, which has come into focus as opposed to supplier risk per se because the macro risks – Brexit is an example, or the trade war between China and the USA – tend to impact many (or even most) suppliers in the supply base. Regulations and standards can change overnight and suddenly suppliers you depended on in certain markets are no longer fit for purpose the following day.

And while dual sourcing or multi-sourcing strategies might get you through certain challenges, there are limits, because you don’t want to end up changing suppliers the whole time. More than ever, therefore, you need to get visibility into suppliers’ capabilities, so that you can choose ones that have the agility to keep up with this rapidly changing trade environment that we are in, and that the suppliers themselves are in. This is prompting us to take a broader view of supplier visibility, one that starts with a whole new way of qualifying suppliers at the outset, thinking of the unknown eventualities. We need to think upfront not just about how suppliers perform in “normal” times but rather, how could they cope with various disruptive scenarios. You can only swap out suppliers every so often, and this implies taking a longer-term strategic view of supply chain visibility, supplier relationships and risk management.

In this context it is also worthwhile reminding ourselves that more than ever, it is customers and their demand that shape how we manage supply chains and drive the need for broader and deeper visibility.

Shareholders also make a point now of asking for evidence that companies are progressive and purposeful, and that they have incorporated their values in their day-to-day business. This was unthinkable until just a few years ago, but now it is an important consideration in major investment decisions.

Taking all of these points into consideration, organizations that want to manage these situations must map out their supply chains effectively, not just at tier 1, but also tiers 2 and 3. They should also become bolder and more positive in their approach to working with suppliers. One example is managing contracts with a view to incentivise innovation and success rather than avoid or mitigate failure. This is not an “either/or” – most companies already do this to some extent – but rather a shift of emphasis in the “both/and”. Longer-term strategic relationships with suppliers must be built on mutual respect and a desire to see shared benefits and mutual growth.

Of course, this creates a dilemma. The KPI par excellence for procurement is cost savings. We therefore need to get the business to recognize up front what it is prepared to invest in for things like security of supply, eliminating regulatory and reputational risk, and rewarding innovation, when there is still unrelenting pressure to contain or reduce costs. An interesting point raised in our discussions was that the only mature approach is for the business to say, “We’re going to factor in a percentage cost and that’s worth X in terms of maintaining the continuity and quality of supply”. It’s akin to recognizing a fair margin. It requires some maturity to accept that there is a price to pay for security of supply and sustainability, but if it delivers value, it is a good investment.

In summary, and avoiding jargon, what mature organizations should be saying to their procurement functions is less “Get me the same stuff but 5% cheaper” and more “Get me something I didn’t have before, and which will be of benefit to the business and expresses the values that we espouse.”

We need to learn to put a value on intangibles like innovation and success. Because to have true visibility, you need to know what you are looking for, and what it is worth.

Read more:

Part 2 | Aligning Procurement: People, Technology and Processes to Deliver Value

Part 3 | How to Talk Procurement to Non-Procurement People