Australia & New Zealand sit at the very tip of the global supply chain and have traditionally sourced globally for both DIRECT and INDIRECT goods to support their service-based economy – but is that still a practical strategy after the Covid pandemic? … asks Jonathan Dutton FCIPS, for SUPPLY CLUSTERS members:
Buying goods professionally from overseas is never easy. And Covid highlighted for many procurement teams in Australia and New Zealand (ANZ) just how hard it can be to balance distant cost benefits against local supply assurance.
Only real business benefit justifies the trouble to source overseas. Apart from obvious hurdles (languages, time differences, different legal jurisdictions, exchange rate fluctuations, lead time), other latent challenges quickly arise (technical standards, regulatory approvals, export/import certifications, cultural differences, freight complexities, shipping delays). All of these were on full display during the Covid pandemic.
The procurement life-cycle process, executed properly, demands clear needs assessment, thought-through acquisition strategy, rigorous market sourcing, thorough supplier appraisal, negotiation, risk managed contracting, positive supplier relationship management (SRM) and detailed contract management. Ever more so to navigate the risks of sourcing from overseas.
Crucially, it all takes time – the one currency that all procurement teams (they are always under-resourced) are always short of – and extends already lengthy lead-times for impatient stakeholders, often predisposed to testiness with procurement over the fastidiousness they see.
Procurement in the pandemic
Yet, perhaps ironically, Procurement had a good Covid. Early in the pandemic they were tasked with securing vital supplies immediately, sourcing new supplies urgently (often PPE) and then pausing indirect supplies without ruining relationships – all whilst working from home without the security of strong office process and easy access to systems.
And stakeholders saw it as a revelation – as one said to a PASA CPO Roundtable group, “procurement brought a sense of urgency, total alignment with our business needs and then operated as a pathfinder through process for us to get things done in a flash.” This sort of success is double-edged though – how to leverage it for long-term benefit yet, more pressingly, how to live up to such expectations when ‘normal business’ and more normal process and lead-times return?
Yet not everything went perfectly during those early weeks and months of the pandemic – business continuity plans were usually found wanting and ill-thought through, IT systems could not always provide the information needed quickly, nor in the right format, and many struggled to get the balance right on urgent sourcing of new requirements like PPE, which quickly became a ‘wild-west’ marketplace, leaving a scramble for secure volumes with dubious new suppliers offering uncertain delivery times, questionable quality assurance on wholly imperfect terms.
These are the experiences that offer lessons for procurement moving forward into the post-pandemic era.
Supply side dramas during Covid
But not everything went quite so well during the pandemic, and early on it was very apparent that many business continuity plans (BCP) failed. Or at least did not envisage the true and full ramifications on the supply side of a pandemic.
Procurement was no exception: the breakdown of paper process led to home-working shortcuts, eProcurement system reports offered incomplete information, digital-signatures quickly became the norm when hard-copy signatures became impossibly slow, video-negotiations proven cumbersome, buying blind without systems support proved tricky, supply chain dramas and bottlenecks were frequent and stock-out dramas and supply-shortages were common. In many ways, a microcosm or speeded-up version of what buying from overseas can often become.
Risk -v- cost advantages reassessed
One key issue that had to be hastily addressed by most major procurement teams was the speedy reassessment of RISK -v- COST; that is, are the marginal cost advantages of sourcing far overseas worth the risk of non-delivery or interruption of supply over long international distances? A key question particularly at the tip of the global supply chain, in Australian and New Zealand.
Clearly, some one-eyed purchasing decisions of the past had started to unravel for many buyers. All too obviously the balance between low-prices and higher-risks had been skewed by hungry procurement teams in the past sourcing globally for perceived sustainable advantage – especially on DIRECT goods.
For some categories of spend, risk of non-delivery is low, and the impact fairly low – INDIRECT goods for example (goods not for resale and required by all businesses – stationery, IT hardware, FM services, fleet, etc …). For others, high risk/high impact:
DIRECT goods (goods for resale, or raw materials, parts and comp0nest) are an example of supply lines likely to be high impact if delivered late (or not at all) …. as well as essential services, raw materials, construction materials and other vital supplies. In a complex and volatile world (suffering a pandemic), is a marginal cost/price advantage worth this risk? Many concluded not. Re-sourcing more locally, on-shoring or building buffer-stocks became instant strategies for many. And part of future BCP programmes too.
This analysis work by many ANZ based procurement teams continued with diminishing intensity it seemed throughout the pandemic. Today? Maybe there is a little complacency creeping back into everyday business life – despite petrol at over $2 per litre, supply chain bottlenecks around the world, a global microchip shortage and inflation soaring on core goods like energy and fuel plus food and grain. ANZ is more vulnerable than it realises to overseas supply shocks.
New strategic considerations on sourcing choices
As inflation rates at end Q1 2022 hover around 7% in the UK, USA, New Zealand and, perhaps, Australia very soon – CFOs face the prospect of mathematically halving our purchasing power (doubling relative cost) within 10 years. If inflation is soaring in advanced economies like the ‘five eyes alliance’ countries – perhaps it makes sense, where possible, to source more aggressively from other countries less affected by inflation?
Also, considering which commodities are more affected than others, by global or local economic forces, and examining what alternatives exist for those dependent upon soaring commodities?
And, if global bottlenecks sustain, indeed get worse perhaps, does this demand a strategic response from buyers to secure medium-term supplies from relatively safer places? That is, places less disrupted by economic, supply chain or health worries – even war, civil disturbance or human rights questions.
Simultaneously, another factor is acting upon lobal sourcing decisions already – the threat of de-globalisation. For instance, the global response to Russia’s invasion of Ukraine, shows the potential for global disruption from a single major player’s act. Russia and its immediate allies are being effectively forced into becoming a single trading bloc – only working with each other.
Does China offer this strategic threat to our sourcing choices downstream? Indeed, might the EU become more insular, now the UK has left, and others are considering leaving? Do other regional groups, maybe like ASEAN, hold potential to rapidly expand both membership and free trade options, and develop into more insular trading blocs? What might be the impact of another Trump residency in the White-house – a second “America-first” doctrine?
The potential break-up of the global economy into trading blocs forces a re-definition of ‘global’ sourcing and a new slant on a more strategic approach to procurement.
More restrictions on sourcing globally
At the same time, the flexibility to source globally is becoming more restricted.
Compliance requirements are growing both formally (The Modern Slavery Act in Australia, and similar in the UK and US, applying up the supply chain) as well as informally – the rising concerns on corporate provenance and particularly the growing ESG (environmental/social/governance) requirements on organisations in order to retain their (local) social licence to operate from stakeholders – including voters, shareholders, customers and staff.
A second, not inconsiderable factor, acting on global sourcing restrictions is the limits on business travel continuing. Some countries still have restricted access, others are perceived as not yet safe enough for travel. Tired corporate travellers seem less enthusiastic to travel extensively, post-pandemic, others are restricted by their employers focus on duty-of-care or their keenness to leverage the pandemic into permanently reducing their business travel costs. Suddenly travelling widely to assess potential vendors seems frivolous – what’s wrong with zoom HR, of all people, ask?
Traditionally, B2B trade websites like, most famously, Alibaba.com offer fast insight to sourcing options in the world’s workshop – Asia. Like an interactive Yellow Pages or a responsive trade directory. Although enticing responses are often superficial and untested.
IT system vendors and software providers have seen the opportunity of supporting the ESG agenda and enabling wider sourcing options well beyond local markets. Many supply-side and eProcurement vendors have quickly developed new and extended functionality with configurable options during the pandemic period to support new strategic goals like improved ESG and greater compliance with both formal and informal polices. Offering better upstream management of supply lines – albeit from your office. And as the author John Le Carre’s principal character, George Smiley, offered, “a desk is a dangerous place from which to view the world.”
In addition, a wealth of smaller providers have accelerated offerings around the space of pre-certifying vendors. A typical model engages numerous vendors (who often each pay a fee, large or small) who submit extensive data and ‘on-board’ themselves proactively with the provider as a ‘pre-approved’ supplier. Buyers (who also pay a fee usually) get fast access to a ‘pre-certified’ vendor base to varying degrees of rigour and authentication by the provider – including, naturally, overseas vendors.
Such providers specialise in certain aspects of interest such as modern slavery, human rights, financial strength, technical expertise, charitable efforts, credit ratings, health & safety records, corporate ownership, environmental performance, media mentions, demographics, governance and the like – in other words, almost the entire ESG agenda. Few of these small tech-driven vendors offering their analysis compete directly, but many overlap – imagine a Venn diagram with two-dozen vendors each competing a little with several others:
Effectively, these tools enable a do-it-yourself (DIY) approach to monitoring your own inbound supply chain – providing you allocate the resources to the alerts these tools create. A full-time job for more than one person usually, in even modesty sized procurement teams.
Service support options
Another angle on the DIY approach to sourcing is to work in-house, but remotely. Instead of travelling to visit remote vendors, use colleagues from within your organisation or within your group. Many do this well. DFAT has decentralised procurement or purchasing representatives, often in a part-time purchasing role, at many of their 105 posts around the world, organised around centres of excellence regionally.
Many large firms have a dispersed procurement team, centred around key locations. But few have procurement people everywhere their preferred suppliers reside or, even, in numerous locations, never mind in the lower cost countries. All procurement teams are busy – and under-resourced (they are not traditionally good at winning the argument for resources from what many ‘C’ suiters deem a “back-office” function. It is frequently reported that getting traction from colleagues far overseas on your ANZ centric procurement project is difficult, when they are focused on their priorities far away.
Turning to international consultancies can bring strong focus with copious temporary resources – the BIG FOUR global consulting consultancies all offer a global service of course. And can relocate quickly to support a client’s needs. But they can be expensive. Very expensive.
More local consultancies, aggregators or procurement contract agencies (body-shops) can help – if you can find them locally and be assured of their quality standards and service levels. Not easy when working remotely from ANZ, of course. Exactly the problem you face ascertaining supplier’s credentials in the first place.
A new model – distributed procurement support
A distributed network of ready procurement offices, skilled to international procurement standards, and located close to a dozen or more of the world’s lower cost countries, could be a handy find for a busy procurement team located in ANZ tasked with buying at globally tested best prices.
Why not use outsourced procurement labour, on a fee-for-service model, on a project-by-project basis, to support your global sourcing needs as and when you have them? Targeted to the regions or lower cost countries that might be most attractive or most likely to work for your business? Or might have a strong track record, or attributes, in supplying certain categories.
Using local knowledge, equipped with international expertise and tools, can bring the best of both worlds to a client procurement manager using an ‘outsourced’ remote procurement team (the AXIS model).
Yet outsourcing procurement work is on the increase – almost a trend in itself amongst busy procurement teams. Locally, in ANZ, the noticeable growth of INDIRECT spend aggregators is clear; some focused on supporting specific sectors, some not-for-profit, some openly commercial. Their future seems more assured as pressure remains on CPOs to keep their in-house procurement teams lean on headcount by using outsources for one-time projects, niche-expertise categories or for managing cyclical spend. Keeping corporate internal headcount stable.
Supply Clusters alone has seen enormous growth in a few short years – offering over 40 categories with pre-negotiated supply contracts for members to benefit from. Each benefiting for the increased volume and leverage of every new member buying form that contract. Staff numbers have also roughly doubled in the last few years – why work to get up the learning curve of an INDIRECT category when professional expertise sits in the SUPPLY CLUSTERS office?
Another trend, throughout ANZ, is the rise and rise of small one-category specialist consultancies is highly prevalent and, unpredictably, specialising mostly in key INDIRECT categories. Well known examples include firms focusing on marketing agencies, print, legal services, ITC support, energy buying and others. These firms prove that to excel in buying even mundane categories today, in our complex and volatile world, strong product knowledge and market awareness to add to any inherent professional procurement capability is crucial to attain the best possible outcome.
Yet client procurement managers can find it difficult to justify budget for “doing their job for them” around the corner, as one described it recently. Or feel threatened by a professional team working alongside. Or can feel nervous operating a team by ‘remote control’ from a distance, unable to micro-manage and feeling exposed to the vicissitudes of overseas supply lines.
Alternatively, as another CPO described it, you can quickly and easily “increase your headcount by 50% overnight” and finally get difficult projects done more easily for the benefit of everyone. Or, just as importantly, delegate INDIRECT projects to the team around the corner, whilst getting on with the strategically more important projects with your in-house team. Benefits that work as well for overseas as domestically even.
Sourcing work, whether from overseas, or even domestically, is not set to get any easier for small or medium sized procurement teams. Right now, international bottlenecks, a war in Europe, a global pandemic and soaring inflation are real challenges. Never mind rising compliance requirements and ESG standards to begin with. And the growing complexity and technicalities of everyday categories.
With limits on headcount and travel having new ‘boots on the ground’ overseas from a trusted partner working in low-cost countries can help re-balance your RISK -v- COST equations, meet rising compliance demands and keep internal headcount stable. You can even spruce up those business continuity plans properly – ready for next time.
Having national or international reach whilst working from home is an ideal we perhaps couldn’t envisage before the Covid-19 pandemic.