I was recently delighted to be joined in webinar discussion by Iain Prince, Operational Transformation & Supply Chain Partner at KPMG. The topic under discussion was current challenges in direct procurement. And [spoiler alert] our focus was not cost control in the traditional sense. The reason being quite simply that there is so much else going on in our organizations and in the world at large that’s grabbing our attention: supply chain disruptions, supplier value management, risk factors, finding the right balance between savings and lead times and, last but not least, sustainability, in particular reducing carbon footprint.
So, there was a lot to pack into a one-hour session! But to focus our attention even more sharply, let’s take our cue from Sir David Attenborough: “The decisions we make this decade are the most important in human history”. No pressure, then! I sincerely believe that procurement has a leading role to play in this transformation, and doing so calls for a true balancing act. We need to bring cost, resilience and sustainability into harmony and in doing so we need to look again at strategic leadership in the function.
From resilience to agility
As Iain was quick to point out, there is no shortage of people offering advice on supply chain resilience. Pre-pandemic, nobody outside procurement and supply chain management ever mentioned it. But everyone thinks they are an expert these days, it seems, and a little knowledge can be a dangerous thing.
For the third year running supply chain appeared in the top concerns in KPMG’s CEO Outlook surveying 1,300 CEOs in top corporations. Supply chain risk is also typically at the top of the C-suite’s risk register. One of the consequences, unfortunately, is that pressure has come from the C-suite for procurement to stock up in case of disruption, leaving companies with too much working capital tied up in inventory. Moreover, it’s often obsolete stock or the wrong stock in the wrong places.
What’s the answer? This is a great example of why we need a change of mindset. Too much focus has been placed on resilient supply chains and too little on agile supply chains. Becoming more agile, as opposed to resilient, could involve, for example, changing production sites, going dual production rather than single production, or changing packaging. The point is that decision-making goes up a notch and this calls for agile minds.
What you can manage or influence, and what you can’t
In procurement you can manage your own physical supply chain and logistics operations, plus warehousing and labor. You can also influence the wider supply chain: which suppliers you buy from and the commercial terms you get, global freight capacity and the competitive landscape (for example by bringing in new suppliers). However, there are areas that you can neither manage nor influence, but you certainly must monitor them – and have contingency plans in place. These include new regulations, closures to major shipping routes and foreign exchange volatility, among others – you can’t control these, but you definitely have to anticipate and react to them.
Iain went on to point out that you need visibility over all of these moving parts in a dynamic environment. Products that used to be profitable in the past may not be today when you add up all the costs in the end-to-end direct supply chain, all the way from sourcing raw materials to delivering final product. But unless procurement is involved in the cost-to-serve analytics, a company will probably never know.
Things to consider, skills to develop
So, let’s look at some practical considerations in the current climate. Under “what you can manage” Iain recommends physical mapping of supply chain and logistics operations. When you start mapping supply chains, you can often be amazed at how much has changed over a short period of time. Suppliers you thought you could purchase from no longer exist. Often, they are outsourcing to third parties or have moved production to another country, completely changing the cost equation. Conversely, for any particular category you may find many new suppliers that you didn’t know existed in the same geography.
Labor is another potential time bomb. KPMG has looked into the average age of labor in manufacturing, warehousing and logistics and it is well into the 50s. Iain cited one client that employs 500 drivers, whose average age is 57. They need to find a solution for a workforce entering retirement age within a few years and it’s not going to be autonomous trucks.
When it comes to what you can influence the biggest opportunity for most firms is commercial terms and, in particular, incoterms – the responsibilities of buyers and sellers for international transactions. Companies that wish to remain competitive are upping their game because tariffs, freight, customs and the other dozen or so incoterms are changing more frequently than in the past. Instead of moving by one or two percent, these changes are pushing up supply chain costs by ten or twenty percent. Again, this is where you need to be agile, not just resilient. Agile companies are moving the inventory and transport risks onto the supplier, whenever the opportunity is available.
In the areas that you can neither manage nor influence, procurement needs to keep a very careful eye on tax, regulations, quotas, and growing protectionism in some geographies. Likewise, you cannot control or directly influence commodity prices, but some businesses are so dependent on a particular commodity or raw material that their procurement people have to double up as commodity traders. Other companies might be so dependent on selling into particular overseas markets that their procurement teams have to embrace skills in foreign exchange strategies such as hedging.
Such is the reality of strategic leadership in procurement today – the role is evolving!
This is the first of two articles. In the second, we will consider what procurement can do to simplify automation and digitalization in the supply chain.
