Few businesses will remain unaffected by the effects of the Covid-19 pandemic: Procurement will also be affected, but how exactly? Jonathan Dutton looks into the crystal ball for Supply Clusters members and poses SEVEN strategic challenges soon to face procurement…
Tactical priorities but strategic questions
Like many people, procurement professionals have been head-down/bum-up working at home. For the most part they have been securing vital supplies, pausing non-essential supply lines, sourcing new stuff (mostly PPE it seems) or just taking the chance to deliver on business-as-usual (BAU) promises; as I highlighted in an article for PASA recently. A few may even be using the ‘gift of time’ to achieve something more substantial?
The second phase of this tactical activity soon focused on new priorities for procurement managers, as I covered in a follow-up article for PASA; managing a remote team and their welfare, balancing team capacity including joiners & leavers, preserving cash for the business, managing SME suppliers, and perhaps beginning to think about the strategic implications on the supply side.
But the danger is that we get trapped in a tactical mindset, doing what needs doing now. Responding. Reacting. Busy. With tactical priorities and not quite getting around to the more strategic questions. Yet, already, the alert amongst us are asking what’s next? How do we emerge from this crisis? What will the new normal look like? How will the experience affect procurement and the stakeholder demands upon us?
Change is inevitable
A good pace to start is, yes, a boring old PESTLE analysis – in fact, there has never been a better time to do one. The scope for change is incredible. Just extrapolating the obvious, or aggregating common predictions, gives a ready picture of how the world might possibly look in the near future, the medium term or the longer term:
In many ways, procurement is well positioned to manage change. In our role we are often the first to see change coming as we are usually involved to some degree in large transformative projects – at least when they need to buy stuff. Moreover, according to regular straw-polls at PASA procurement conferences over the last three years, fully 100% of procurement teams have been through major transformation projects themselves (some even for the second or third time), or are going through it currently, or are planning to conduct such a transformation project. So, TAU then – transformation as normal.
‘Change is the only constant’ – Heraclitus
Applying these possible trends to the world of B2B business is not so terribly difficult either. Businesses will soon look up from crisis management. Immediate cost cutting will give way to a strong focus on RISK. How are their business models vulnerable? How do they build resilience? How will PESTLE trends affect their businesses? How must they adapt – both now and in future?
Simple ‘tells’ will reveal their thinking – spending cuts, lower staff ratios, stern business casing and slow investment curves. Betrayed by no business travel, little training, fewer events, lower budgets and reversing investments in large, shiny CBD offices. But then, perhaps, amended models, altered messaging and refined product propositions to suit a changed market.
The Five R’s
Already there are winners and losers from the Covid-19 crisis. Surveys have suggested that between 50-70% of firms have been significantly or even dramatically affected by changing trading conditions. Those that adapt quickly and well will thrive. Those same surveys suggest roughly around 20% firms or so have already come out ahead – and not just the supermarket chains.
“Never waste a good crisis” – Winston Churchill
Business leaders will quickly embrace Churchill’s maxim (above). McKinsey have elaborated the thought into their Five R’s to cover the five stages of business management response:
In crisis mode we become quite reactionary. Next, we enter a normalised crisis mode (as I write) and, soon, work into an ‘emergence’ of change towards a new normal – an adjusted ‘normal’ state. McKinsey explains this better with their 5 x R’s model.
If your organisation has been materially affected by the pandemic, imagine how these steps could help you get back in front? Procurement, as a profession, will also face challenges and may usefully adopt this framework to help frame them.
Seven challenges facing procurement:
As we emerge from the pandemic crisis, procurement will be strategically challenged in seven key areas – some of which will feel more relevant than others depending on the nature of your business. But, handled well, each could be a real opportunity for professional procurement as we forge the new normal:
- Refocusing on securing supply lines and balancing risk
- BUFFER STOCKS – holding stock on site, or nearer (not overseas) to our manufacturing plants or delivery points.
- NETWORK OPTIMISATION – source components from suppliers closers to our distribution centres (DCs), which in turn, are sited nearer to the customer market we serve
- MAP VALUE CHAINS – which players within your inbound supply chains are vital. Which are risky bottlenecks? Which are easily replaceable? Which are in risky countries? Which are nearby? Which are irreplaceable?
- DUAL-SOURCING – single sources can present real risk. The tsunami in Japan stopped one Victorian car manufacturing line for the want of electronic resistors as they single-sourced there. Their competitor plant just 80km down the freeway dual-sourced and never stopped.
- AGGREGATED SOURCING – using aggregators is a genuine short-cut to off-the-shelf deals, built on others’ volume, on pre-agreed terms (the Supply Clusters model); but they often only deal with INDIRECT categories, though these increasingly include MRO, energy, freight & logistics providers and other semi-DIRECT categories.
- ALTERNATIVE SOURCE INDEXING – should you need to, where would you buy your essential supplies from? Where are they available? Do you have a list? One procurement team faced the closure of their factory in China, in Wuhan, early in the crisis, where they made key components. They were soon trying to buy like components from their competitors in order to satisfy local customers in Australia.
- Improving procurement responsiveness and agility
- Managing demand & reducing non-essential spend
The first responsibility of a professional buyer is actually to secure supply – not to bash down price, as many think. The bottlenecks and early shortages during the pandemic highlighted the value of a secure supply line. And the folly, in some cases, of relying on single -sources, overseas suppliers or very large vendors to deliver on our urgent needs. Competition for stock was a thing.
This means, in future, we need much stronger strategic focus on uninterrupted supply lines – even if demand explodes overnight. Does this mean old buffer-stocks? Dual-sourcing? Onshoring supply to locations nearby? Re-shoring things we have previously outsourced? Mapping supply chains to ensure materials requirement planning (MRP) will always work, not be left wanting & hoping for a single part to complete manufacture? In other words, network optimisation of supply being nearer demand? Of flexible (or agile) supply markets? This is the level of thinking that is required now, to prevent the same scenarios (or worse) downstream.
The new focus will be on risk and continuity of supply – come what may. Pandemics are but one risk, one cause of supplius interruptus. What of volcanoes, wars, pirates, tariffs, earthquakes, floods, insurrections, sanctions, tsunamis and the like? We cannot predict these things, but we can anticipate supplius interruptus – that is our professional duty.
So what exactly do we do to minimise future risk? What strategies can we consider to make our business more resilient to supplius interruptus:
Single-sourcing can be a procurement indulgence from time to time. The search for ever more savings in the past was sometimes driving one-eyed decision making, and building risk into your service chain as a consequence. To some extent procurement is a victim of its own success, as well as its own myopia on savings. There are many other ways to deliver value – and this might be the challenge facing many procurement managers next.
Imagine a stakeholder in 12 months timing saying, “whaddayamean 9 months for a go-to-market exercise? You sourced things in three days flat during the pandemic!” Easy to imagine eh?
Working through a likely recession, stakeholders focused on resurrecting or protecting a company will be less welcoming of the drag of procurement process. We have to find quicker ways to work. To re-balance the risk of speedy sourcing with clumsy shortcuts in due diligence and risk management.
One way to do this is through AGILE Procurement; simply the principles AGILE management developed in the IT industry over the last twenty years, applied directly to procurement process with Sprints, SCRUMs, stand-ups, Big Room Workshops and three or more suppliers in a room for two days bidding against each other. The most famous case study being how to buy an ERP in two days.
But the short aim of any Agile Procurement project is to cut sourcing time from 9 months to 9 weeks – or 9 weeks to 9 days. It is innovative, iterative and intensive. It is not a short-cut, not a process dodger and not an alternative to strategic procurement. PASA now offer an authentic training course on Lean Agile Procurement from those that invented it.
Fundamentally, though, AGILE methodology is not about SPEED – it is about responsiveness. That is, responsiveness to changing situations, changing markets, changing circumstances, changing needs. Deploying it to manage complexity is how it works best.
An early priority in pausing non-essential supply lines during the early days and weeks of the crisis was not so much to cut costs as to preserve cash. At that stage, nobody knew how long they’d be required to survive with whatever cash was at the bank. And at that time, negotiating Force Majeure and pausing non-essential supply lines was more about cash preservation and massively reduced volume needs than it was about simple cost cutting.
As we drift back to work in the office, a number of immediate trends seem obvious; for instance:
- Office space will be required less – as homeworking is suddenly viable for so many. And less opulent offices will be required; we have learnt to work on laptops balanced on wobbly books on the dining room table – do we really need self-raising desks, hot-workstations, privacy booths, private cafes, corporate lounges, creative areas, corporate massage, nap-pods and mind-gyms?
- Travel will drift back only very slowly: International travel perhaps the last thing to be allowed? Then, any travel at all will be difficult to justify. As will attending events, conferences, supplier visits, training and touring our other office locations around the country. “Just zoom them” will be suggested instead.
- Staff ratios will be re-calibrated. Admin staff threatened, passengers in the office weeded out. Vacancies cancelled, contractors let go, consultants sent packing. Then after this cleansing, perhaps, more use of flexible labour like contractors will be used – at the expense of permanent staff, as FTEs fall. Just when so many workers will prize a proper full-time job after the crisis, ironically business will be even keener to use variable cost labour (freelancers) and not fixed cost overheads (staff). In procurement too, as we are not exempt from searching questions just because people assume we are the actual cost-cutters-in-chief – as one CFO once pointedly asked; why must I carry permanent overhead to manage cyclical spend?
Trends like these will straddle most aspects of modern day office life and illustrate a role for demand management. All non-essential demand will be challenged in the near future. And INDIRECT spend will come under new pressure – category by category. These examples illustrate a role we can play in demand management; in managing the process that brings the outcome of an approved purchase, or not. It is policy and process that will save cash here – not beating down supplier’s prices.
Continuing this theme, businesses will look to alter their business models to minimise fixed costs in favour of variable costs – which go up and down in direct proportion to volume. Airlines are a good example – high fixed costs, with uncertain and variable income streams to cover very large amortised debt on assets like aircraft. Ask Virgin Australia about it.
Expect procurement managers to be under pressure to contrive such variable-pricing agreements with suppliers in future. Price variation formula (PVF) will come out of the procurement textbook and become more normal.
Variants on PVF themes will become more innovative too – rebate schemes, surplus stock buy-backs, shared impress stock, price breaks and the like will become more normal than exceptional, as we innovate to dodge cost and shift risk back to suppliers. As buyers, however, will may asked to pay more per unit in return.
Especially when suppliers are asked to run with in-built social distancing – airlines flying with the middle-seat free, reduces revenue by up to 33%, so fares increasing proportionately is likely. This will apply to other industries impacted by revised demand markets (cafes in the CBD) through to those forced to distance people (conferences or theatres maybe) or supply below EOQ (economic or minimum order quantity).
Another common issue early in the crisis was the amount of procurement teams who did not have data to hand. Or rather, they had the data, just not the information. For all the investment in ERP and P2P systems, too many could not work out quickly or easily enough who exactly were their most important suppliers, who were not, and which could be quickly shelved, which might be needed later* Moreover, they did not have the right contacts in each supplier – who to ‘phone? Where’s the number? Refreshing supplier data every 13 months looks inspired now.
Most certainly did not know who the most vital second-tier suppliers were? Those suppliers that supply our suppliers. The ‘system’ also couldn’t tell one Aussie manufacturer of bottles, for example, that the little blue bottle tops they used came from northern Italy. For the want of these, all production stopped.
Mapping supply chains will become the norm for essential supply lines (DIRECT spend) – not for the purpose of eradicating modern slavery, but to secure supply lines by managing down risk. And a good place to put such lists would be in your system – with a parent/child sourcing structure. Just saying.
Expect the trend to desktop dashboards, built on cloud-based widgets, with text feeds from legacy systems, to continue. Microsoft POWER BI in other words (free with Microsoft 365) or TABLEAU software (if you are feeling flush). Several boutique procurement consultancies offer such services on such platforms. I expect them to be busier on this before very long. What makes these tools so handy, apart from the low cost and the easy configurations, is that they are entirely bespoke to your own business. Your business is different right?
There are many ways to segment your supplier base, once you have a reliable list of suppliers (preferably with no dupes, postcodes, spend data, transaction counts, cost codes & UNSCPC coded).
But, a slightly new take on segmentation, mentioned by a good few CPOs with a new sense of urgency in the early days of the crisis, is the split between ESSENTIAL -v- NONESSENTIAL suppliers. Your definition of ‘essential’ may vary from others. But it differs subtlety from “DIRECT” supply lines. It is closer to home. Nearer the mark, and more specific to your needs. And easier to list.
Regardless, once you have answered the question of which are your key suppliers and which not* – whether you have used the ‘Kraljic Matrix’ or not – the next question is which suppliers do you want a relationship with, and why? Usually, your most ‘strategic suppliers’ – those which could bring your business to its knees far too quickly were they not to supply you for a week or two.
Building relationships with hungry suppliers is not difficult. And SRM (supplier relationship management) thinking embraces this well. But strong relationships get formed as we face adversity together – especially for procurement people working closer with vital suppliers at a crucial time such as a pandemic. If nothing else, this should convince procurement managers (and, more, their bosses) of the role good business relationships can play in getting the supply side moving and ever more efficient.
Our ‘C’ suite bosses understand the value of business relationships. They wouldn’t get appointed to the top team in the organisation without having experienced the benefits of good business relationships in their career. Yet, ironically, when it comes to suppliers, they often revert to a ‘master-slave’ mindset demanding you “squeeze the lemon” or “bash the price down”…
This is why justifying an SRM strategy can be so difficult. Explaining to a gruff CFO why we want to be ‘nice to suppliers’ is rarely well received. Justifying why it is in our best interests is also tough. “They want our business don’t they?” asks the sceptical finance director. True enough, but not at any price. And a good working relationship builds teamwork and attracts the many benefits it brings. But these can be nebulous and tough to quantify (unlike savings). Justifying SRM strategies is a challenge for procurement managers – but an essential strategy, I believe, in an oligopolistic market like ANZ, as savings tend to zero and VALUE gets defined in other ways moving forward.
Utilising SRM will be all the easier in future if we can capture the real benefits of close working relationships with suppliers ‘during the crisis’ and all the easier if you can even quantify them.
An early virtual PASA CPO Roundtable (on ZOOM) became a little confessional. Said one CPO, “I have just checked the long-standing contracts with our two principal strategic suppliers; neither has a Force Majeure clause!” Oops.
As the Force Majeure webinars suggested, force majeure is largely an ‘agreed inability to perform’ – alas, most force majeure incidents are pretty quickly not agreed, hence you have to ‘claim’ Force Majeure. You are always in a stronger position if you have foreseen a likely (or unlikely) scenario and legislated for it by name within your clause. You spelled it out. At least it strengthens your negotiating position.
There are many other in-built solutions, remedies, scenarios and what ifs within contracts. Considering them more carefully instead of skipping over the ‘boiler plate’ section will be required for key supply lines in future. Will this mean a hasty review of all strategic contracts? (Yes). Does it mean new templates? (Yes). And would contract automation systems help in future? (yes, but not quite as much as you think, say IACCM – a topic for another day).
Of course, better contract management will only help avoid problems in the first place. This is an area of real opportunity – benefits realisation downstream from upstream business planning and negotiations.
What should we stop doing?
In addition, to these seven pressing challenges facing procurement, there are likely things we will have to stop doing, or curtail, or at least, review in the near future:
- Sustainable procurement initiatives – some are mandatory (like modern slavery) but might become more like compliance exercises than the cause celeb it felt like last year. Others may be policy commitments (indigenous owned suppliers) and can likely be sustained without drama. Yet, Social Procurement may well strengthen – with so many people now suddenly unemployed, driving employment policy through procurement may work well; certainly in the public sector arena. Yet other sustainable procurement initiatives might seem like a tangent or even an indulgence if organisations are fighting to survive.
- Extracurricular activities – sitting on industry committees, subscribing to time-consuming professional support groups, presenting at semi-irrelevant events, may also come under the microscope – where is the direct benefit to the organisation at present? Can your learnings be directly applied to the business now? Is there an RoI? Are they value for money? Are there alternatives?
- Meetings bloody meetings – going to back-to-back meetings for a living is not a real job. Procurement can sometimes be caught attending meetings due to FOMO, or to ingratiate themselves with stakeholders, or to look important. Only attend where you can add direct value – do not attend to police discussions.
- Probity and compliance – everyone wants an even playing field. Everyone gets ‘trust but verify’ – but jumping through time-consuming hoops to pacify process cops or sanctimonious probity bunnies is rarely adding true value. If the business is fighting for survival, some processes occasionally begin to look more like virtue-signalling indulgences. We need to call those out. Are they adding value, protecting the business or just about feeling better about ourselves?
- Paper based signatures – One other factor relevant to contracting in future is to sort out online approvals and, particularly, signatures on agreements and contracts. The law often struggles to catch up with technology. As does corporate practice. A well timed LinkedIn rant by Peter McFarlane, managing director of Grosvenor procurement consultants, on the idiocy of mailing hard copy agreements around during the height of the crisis to get urgent work started by three parties illustrated the point. E-approvals, digital signatures and even apps like Doc-U-Sign are becoming standard practice and should be everywhere. The NSW government did issue a practice guide on this here. There is no point speeding up the procurement process to get held up for two weeks waiting for bits of paper to get scribbled upon. PASA Connect also recently ran an online Roundtable on exactly this topic.
A new professional priority for procurement
Procurement has been on a strategic journey. The overriding priority and driving force for procurement people for nigh on 80 years has been to achieve greater value-for-money. Savings. Or at least getting more bang-for-their-buck.
More recently, many found sustainable procurement (in its broadest sense) a new priority and a way to add sought-after value. I said myself in speeches, many times, that properly applied, sustainable procurement has the potential to change the fabric of our decision making in procurement.
Yet, now, we have a new priority – security of supply. Especially at the tip of the global supply chain in Australia and New Zealand. Our first responsibility is always to assure supply. Never more so than when supply lines are in such jeopardy. (It could all have been so much worse).
This brief will come in the form of securing current and alternative supply lines, reassessing risk, value chain mapping, assessing MRP vulnerabilities, negotiating with second tier supply lines and instituting new strategies to assure supply in future – all ready for the next supplius interruptus.
But after that, beware. Because when that hill of work is complete – I sense we will be asked to confront the north-face of the cost-cutting mountain once again. The role we may be asked to play is to adjust the cost base of the revised business model for our organisation post-Covid-19. It may also be much more subtle than slash’n’burn price down, cost out, activity. Which is a good thing, as we have sorta done savings. They are tending towards zero in many categories now; there is little fruit left to pick.
In fact, this newer brief may look more like cash preservation and converting fixed to variable cost. Or pre-agreeing buy-backs and variable guarantees or other monetary and quantifiable value from vendors. Which is altogether more difficult and, really, a different focus. We must take care not to be the General fighting the last war, when it comes to managing cost in future. Naked savings will not be quite so easy. Cost realignment is still possible for those with ingenuity.
Managing beyond Covid-19
Meanwhile, back at the ranch, we have to work through the reactionary agenda of the current crisis with care. It is easy to whittle away time being thoroughly tactical. Good old-fashioned purchasing. Many are in this tract right now and it is a comfortable fit for busy buyers supplying energised businesses.
Except, we cannot take liberties – with the team, with stakeholders, nor with suppliers. For there is a test at the end awaiting us, in the guise of a question: What do you want to be known for after the virus? How did you do? Did you react well? And in the ‘right’ way? And preserve relationships, even better them? What did you manage to achieve despite all the constraints?
With the ‘emergence’ phase now upon us – managing out of crisis mode back to a new normal (whatever that turns out to look like) – we will begin to reap the benefits of our approach in crisis mode. Or, for a few, pay a price perhaps.
And this emergence phase – or RETURN phase – will be the time of our greatest uncertainty. And the time to invest in rapid thinking of how we can shape our new normal for the better.
In other words, the time to lead. Particularly, leading solutions from the supply side which thread these seven strategic challenges. Seven challenges we should embrace and use to lead. Before others start formulating questions that shape our destiny more than we might want.