How will the experience of Covid shape the challenges facing procurement in 2022?
Procurement had a relatively good crisis. So, what does this mean for the future, starting immediately with 2022? Jonathan Dutton considers the challenges facing procurement in 2022:
Procurement did relatively well throughout the crisis of the last two years. A new level of engagement with stakeholders, better business alignment and a real sense of urgency developed following the much higher profile for the supply side during the crisis – both publicly (toilet roil shortages etc) and corporately (business continuity dramas).
So, does this put procurement front and centre for 2022? Have we perhaps raised expectations? What new challenges might we face now? Are we ready? In short, what’s next?
There are SIX core challenges facing all modern procurement teams during 2022 it seems:
- SOURCING BALANCE
Rebalancing the trade offs in sourcing decisions of the past, around COST v RISK, is an early priority in 2022 for procurement teams who have not yet started this work in detail.
Is it still best to capture cheaper prices by sourcing overseas (particularly), yet also accept the heightened risk of non-delivery from far-away sources? Driven by securing operational supply (certainly for DIRECT goods) to ensure business continuity, many are now rethinking priorities – is it worth a little to ensure delivery by sourcing (much) closer to home perhaps? And, especially in Australia and New Zealand, given we sit at the very tip of the global supply chain and are more vulnerable to choked supply than most?
A new factor in this thinking is not just generic risk of non-supply (it is a long way to ship stuff from China, Europe or the Americas) but also the sheer cost of shipping (container shipping process have reportedly increased by up to 600% during 2021) and its new scope for unreliability (many containers are in the wrong places, delays and bottlenecks are widespread globally). Global logistics is in something of a fix currently and will not be sorted out before next year at least.
In short, how confident are you that your vital Top 10 overseas supply lines will definitely deliver in full and on-time (DIFOT) in 2022?
- SAVING SMALL SUPPLIERS
How dependent on small (often local) suppliers are you? In remote places, especially, dependence on reliable small/medium sized (SMEs) suppliers can be operationally or practically vital.
Yet, in early 2022, as we return to a new-normal after lockdowns, some of those suppliers will be in jeopardy. The cash demands of restarting businesses (new stock, unpaid bills, hiring new staff, advertising, re-opening set-ups) never mind the accounting costs (stock write-offs, rent arrears, outstanding tax liabilities) can be overwhelming for any SME.
It is well understood that cash-flow constraints are the number one cause of small business failures. As temporary insolvency protections recede, many SME suppliers will face insurmountable cash demands to restart operations and to sustain them in the short-time. Expect fewer discounts, rising prices and charges for additional costs.
But professional buyers can do much to help SME suppliers; such as greater volume commitments, extending agreements, paying early or up-front, buying other product lines too. These are small things for a big buyer, but big help for a small supplier.
In short, How badly do you need to keep local, small suppliers – and what are you prepared to do to try and keep them in business?
- MANAGING INFLATIONARY TIMES
Annual US inflation was reported at 6.8% by the December 2021 quarter. Many forecast it to grow further, not contract. Its influence on the Australian economy is well reported.
Australian inflation expectations were running at 4.9% by end November 2021 – more than double recent year’s experience. With unemployment plummeting as businesses hire-back after the pandemic, and well reported staff shortages are realised (no foreign students, missing overseas workers, few immigrants and no FIFO contractors in the market, added to large numbers of regional migrants out of CBDs and to growing great-resigners) and force wages UP, so inflation seems set to rise further in 2022. Certainly, either side of a General Election which inevitably spurs fast government spending promises.
Few working in line procurement jobs today can easily remember peak inflations rates of the past – some 15% or more in the 1970s and 11% in the1980s, even the 5% of post-GFC period in 2008-10.
Buying during time of inflation changes how you buy:
- You negotiate price-increases down, not prices down.
- You stockpile or spot-buy today, to ensure future supply at pre-determined costs to protect profitability.
- You calculate net present value (NPV) and discounted cash-flow (DCF) and do not simply assume current values.
- You include price variation formula (PVF) in contracts, based upon agreed metrics and measures (inflation, CPI, core commodity prices) to allow managed increases
- You often minimise go-to-market processes to avoid attracting increases in price
- You manage demand better or source substitute products
- You weigh supply RISK against cheaper PRICES in more remote markets
In short, how capable are you of deploying inflationary buying practices quickly and easily during 2022?
- REALIGNING TO NEW STAKEHOLDER NEEDS
Part of procurement’s success during the pandemic was the building of stronger stakeholder relations built upon a much greater alignment with their core business needs (speed, a sense of urgency, process short-cuts, enablement not obstruction).
Leveraging this new relationship strength will be key to determining new business priorities in 2022 and, subsequently, new business approaches:
- How can we utilise AGILE PROCUREMENT approaches to speed up the sourcing (or re-sourcing) process?
- How can we determine which of our SUSTAINABLE PROCUREMENT strategies is more important, or more brand-relevant, and therefore more worthy of resources (time, money and effort) than others?
- How can we agree which supply lines are inherently HIGHER RISK and GREATER IMPACT than others – so that we can re-source more assuredly?
You might say that ‘stakeholder relations’ are not a ‘new’ challenge for procurement – and you would be correct. But stakeholders saw procurement largely in a different light during the (early stages) of the pandemic – urgency, alignment, proactivity. This enlightenment has created the opportunity for stronger relationships which can work more proactively – and this is new.
In short, are you ready to have difficult conversations with senior to stakeholders to enable difficult decisions on business priorities this year?
- DIGITISING PROCUREMENT
This is perhaps the most difficult challenge facing procurement leaders during 2022 – how to both correct the digitisation mistakes of the past and, at the same time, capture the challenges post-pandemic of collecting, managing and reporting the right data in the right way at the right time.
Most mature procurement teams have been through at least one formal ‘digital transformation’ process – some are on their third. Managing the opportunity of redefining their perfect procurement process and digitising/automating it for ease of user experience (UX), better supply-side service, enhanced risk protection, increased compliance to policy, improved efficiency and greater spend control (and savings).
Yet the urgency of the pandemic revealed many unfinished digital transformation projects. Or, surely, those not quite delivering upon their original business cases. Perhaps offering incomplete data with inaccurate or at least incomplete reporting. Given past investments in eProcurement technology, some C suiters seemed unimpressed with the returns. In fairness, the eProcurement vendors certainly (if not all CPOs) recognised the limitations of their products and have worked hard to close these gaps since, it feels.
Again, like in (5) above, you might say that compromised digital transformation projects are not quite new. In fact, ubiquitous. And, again, you would be correct. But the profile on their importance now, plus the will to get them right and the new strength of the inherent business case, with strategic backing, have never been higher. Now is the chance to get them right – and keep them right.
In short, have you defined your gaps between your available supply-side data and the new information & reporting demanded by your business?
- MANAGING OUR TEAMS
There are three prescient ‘personnel’ questions for procurement line-managers coming back to work in 2022:
- What is our back-to-the-office plan; and, maybe, how do we best capture the benefits of working from Home (WFH) -v- the benefits of working-in-the-office (WIO)?
- Which of my team might we lose in the short-term … for better roles elsewhere (as usual) or as ‘great-resigners’ (less usual) re-evaluating their own personal priorities?
- Will the team I have to manage this year, have the capability it needs to deliver the new strategy in 2022?
- This first question on WFH v WIO is not unique to procurement. And HR teams in larger organisations will doubtless be obsessing over a detailed plan for your organisation. To a large extent you will have to conform to their policy. The only difference for procurement is how you can best engage with internal stakeholders and the external market in such a framework? Fastidious rules on participation in external meetings, attending training courses/conferences on new ways, and visiting suppliers are possible areas of compromise.
- This question of higher staff-turnover during a skills shortage is also not unique to procurement; although the skills shortage is anecdotally quite apparent in the procurement industry – in some places (Adelaide) more than others (Sydney) perhaps. Specialist recruiters report that they have “never been busier” and good procurement people get hired quickly it seems (suggest numerous LinkedIN notifications). The “shortage” of well trained ‘poms’ for hire (often with MCIPS) seems more acute than usual, post-pandemic. Your key question is, if you lose people, are you confident of backfilling them quickly at a similar cost? What else can you offer to attract and keep good candidates maybe?
- The first step in defining capability, should be defining needs. Your strategy can determine these at a HARD SKILLS level (buying during inflation, risk management, supplier appraisal/development, SRM) and at a SOFT SKILLS level (commercial acumen, building relationships, problem solving, working in groups).
Assuming you have some gaps (by team or by person), making the resources to fill these in a proactive and planned way is key; the discipline to plan (personal development interviews), to make the time (never a good time for training eh?) and to buy right (budget for blended learning or 70/20 inputs). This is the practical challenge facing under-resourced procurement managers in 2022. The free PASA white-paper on “L&D in Procurement post-Covid” covers all these questions and more in enough detail.
In short, is your team equipped to handle the new challenges that procurement face, starting in 2022? And, usually, how do you UPSKILL them (in the key areas) as quickly as possible but as time-efficiently as possible, and at the least reasonable cost?
There are also other challenges that normal procurement leaders will face. Certainly, ones a little closer to home. Within their own organisations, perhaps, aligned to specific brand or business challenges post-Covid?
Yet these SIX challenges (above) represent a pertinent set of generic challenges facing the profession in Australia and New Zealand (at the tip of the global supply chain, of course) – surely, if the strong anecdotal feedback we have seen and heard at PASA during the last two years, at a dozen or more PASA Conferences and over almost 200 PASA CONNECT industry roundtables, is correct.
Indeed, these SIX challenges also feel well aligned to much of the formal research we have seen, and the free PASA white-paper on “The 7 challenges facing procurement Post-Covid” which was written way back in April/May 2020, which has proved surprisingly sturdy, even prescient in the last two years almost.
Whatever your exact challenges, there is much work, but real opportunity facing procurement in 2022 – good luck.