4 Years on: How COVID exposed 3 Procurement Orthodoxies

[James_Marland]

Traditional Procurement strategies fall short and need to be replaced with leaner, more adaptive and intelligent approaches. Heresy or Orthodoxy?

New Years Eve 2023 marks four years from the first news reports of COVID-19. (If it had been published one day later, we would be calling it COVID-20). What have the intervening four years taught us about Supply Chain Resilience?

The COVID-19 pandemic highlighted the vulnerability of global supply chains. Lockdowns, travel restrictions, and factory closures disrupted the flow of goods and materials, leading to shortages and delays. Although the medical crisis has largely abated, other external factors such as geopolitical crises, weather events and labour shortages continue to stress supply chains.

Procurement Orthodoxy has failed in three ways, one was a rush to rationalise procurement on to a small number of suppliers, because that was easier to manage, and could lead to concentrated buying power. The second failure of Orthodoxy was over-reliance on Lean Manufacturing and low safety stocks as CFOs looked to hoard cash rather than material. This strategy was exposed as the different crises hit. The third was repeatedly pushing out Payment terms to smaller suppliers, to bolster the buyers Cash ledger, but at the expense of small suppliers who didn't have easy access to Trade Finance. Under stress, some of these firms failed.

If we look at the three ways that traditional procurement orthodoxies have failed to hep companies during times of stress, its no good to just do more of the same. Here are three changes that companies can do:

War-room Black Swan Events

To prepare for future supply disruptions, leaders should run "war room" simulations to develop contingency plans. By bringing together different teams, they can develop strategies to mitigate risk, like dual-sourcing key components and identifying alternative suppliers. Simulations should use predictive models to estimate impact so companies can build redundancy into the supply chain ecosystem and respond quickly when faced with sudden disruptions caused by black swan events. The focus should be on flexibility - finding additional capacity and alternatives to maintain continuity despite shortages.

Procurement teams should identify alternative suppliers in different regions to mitigate the risk of shortages and delays by conducting thorough research and building relationships with multiple suppliers.

Being too Lean is unhealthy now

Maintaining strategic stockpiles of critical materials buffers against sudden disruptions sounds good but ties up capital, as well as increasing warehouse and logistics costs. Procurement teams should analyze historical data, market trends, and demand patterns to identify which items are most critical, based on the revenue impacted if a batch  of finished goods cannot be shipped to a customer.

Be nice to your suppliers

Companies should take a more mature approach to how they pay their bills and generally treat their suppliers.

The balance of power between buyer and supplier has fundamentally shifted.

The old style approach of assuming that suppliers are desperate for your business is now not always true. Use historical data and predictions to understand which suppliers are cash poor, and make arrangements to help them with finance. This not only is the right thing to do, but such suppliers will then start to treat those customers as customers of choice. Everyone likes a customer who pays early. Building strong relationships with suppliers is crucial for ensuring resilience.

Suppliers used to be like your kids – "Do what you're told". Now they respond like teenagers.

Working with suppliers who "respond like teenagers" requires a more complete understanding of the category: who has the power, how many alternatives are there, are suppliers over capacity and how to help suppliers with their cash.

AI-powered Business Tools

One thing that has changed substantially since the start of 2020 is the rampant rise of AI. To be effective AI needs to be embedded in the day-to-day transactions, and it needs to be able to rely on accurate, confidential business information.

At SAP we have included our Business AI into our tools such as SAP Ariba Category Management, Taulia and SAP Business Network.

It's time to be a heretic, don't follow the procurement orthodoxies.