The 4 unavoidable questions for procurement leaders in 2023
January 2023, By Jonathan Dutton FCIPS, CEO at PASA
Outlined for Supply Clusters members by Jonathan Dutton FCIPS,
There seem four clear, immediate and unavoidable questions facing procurement leaders in 2023.
Although, some chief procurement officers (CPOs) might very much be wishing that they are not specifically asked these questions by their boss, or their stakeholders, for they are pointed questions with few easy answers.
Yet, even if they are lucky enough not to be directly asked, there is no escaping these questions challenging your business during 2023 if you rely on your supply side to any great extent.
How exposed are you?
So, essentially, these are questions pertinent to all organisations regardless of sector, shape or size – as long as the organisation relies on their supply-side to some significant extent, as the vast majority of businesses increasingly do as we continue the trend of outsourcing more.
Indeed, UK based research by procurement consultancy Proxima, around ten years ago, and often repeated by others since, suggested that well over 80% of very large firms typically expended between 40-70% of their total revenues on third party supplied goods and services. Their “Corporate Virtualisation” research illustrated the growing trend towards outsourcing as a strategy.
What percentage of revenue does your organisation immediately spend with its suppliers?
Once you have answered this preliminary question, these four difficult questions, that seem so unavoidable in 2023, come into sharp perspective for most CPO’s:
The FOUR unavoidable questions for procurement in 2023
The four questions, then, perhaps in order of significance?
1. Will our direct supply lines remain resilient enough for our business throughout 2023?
2. Are we over-exposed, including through Tier 2 and Tier 23 suppliers, to vulnerable low-cost countries such as Russia and her allies, Iran, China and even, now, Brazil?
3. How can we mitigate the effects on our business of relatively high ‘cost-plus’ inflation in so many countries, let alone make any direct savings at all?
4. How on the supply side can we hope to meet consumer and stakeholder expectations of the dizzying array of objectives under the ESG banner – the environmental/social/governance standards increasingly expected of organisations public or private, large or small?
The multitude of supplementary questions
Four succinct but stubborn questions that, to a great extent, sum up the challenges facing CPOs in 2023, post-pandemic. But which is most important for you? Where is the priority? What to do first? Who to get to help? How to manage each challenge? When to tackle each?
Experienced buyers will know that as you start trying to answer any of these four questions, a multitude of supplementary questions instantly appear, presenting a geometric progression of possible answers and permutations. A perplexing mix of options is difficult to think through or prioritise. Everyone wants everything, it seems, and all at once, with no increase in resources to help you. This is a typical scenario for the ‘back-office function’ that many CEOs still perceive procurement to be.
Covid has taught us again that supply resilience is critical – especially for DIRECT supply lines. To be honest, we should have learnt this lesson sooner. During the GFC perhaps, or the volcanos, or many of the tsunamis/earthquakes/floods of recent years, even recent wars, insurrections or pirates? Or, indeed, previous pandemics such as bird-flu, swine-flu or SARS? But, really, any of the primary causes of major supply interruption. The supply implications from the Covid pandemic and the war in Ukraine are now obvious to all.
Yet the causes of major supply interruption are rarely predictable - certainly by humble buyers. But, at least, to some extent, this makes the causes somewhat irrelevant. What is predictable is that something might well befall our vital supply lines and interrupt them, temporarily or permanently. Regardless, in any such scenario, the key procurement question is the same – what is our PLAN B and how fast can we implement it?
The procurement leader’s responsibility is to have a cogent and thought-through PLAN B at the ready, for all their critical supply lines. One to be implemented immediately supply lines are interrupted.
Ideally, this means effectively doing the original sourcing job twice – once to determine the best supply line, then again to determine the best alternative supply line, should something happen to the first best option? Two negotiations and two agreements and two supply lines, not one.
Many CPOs have recognised this reality just a little too late – and not just-in-time. Today they are likely engaged in reviews of business continuity. Preparing for the next ‘pandemic’ or the next wave – shoring up supply lines just in case, or more realistically working to re-balance the potential risk of non-supply with the quantified benefits of global sourcing and, particularly, low-cost country sourcing – savings.
The first step in forging a programme to build supply-side resilience, and reducing supply-side risk, is understanding where that risk lies, its likelihood and its potential impact? Building a two-by-two matrix mapping likelihood versus impact for each risk may help – maybe also use the ‘traffic-light’ grading of risk red/amber/green.
For your major supply lines at least (say, your top 20 suppliers, or your DIRECT categories) this is all very doable with modest resources. But this exercise gets disproportionately more difficult evaluation your supplier’s suppliers – your Tier 2 suppliers. Tier 3, yet more difficult and confusing. One global Top 10 brand has mapped their entire regional supply chain to Tier 3 for the APAC region from their Sydney office. A three-year, multi-person project. But justified by “proactively protecting our brand reputation” says their CPO.
Not everyone can easily win the business case to invest so much, nor has a Top 10 global brand to protect, nor can afford the resources required. But segmenting your supplier base into DIRECT V INDIRECT supplies and HIGH v LOW spend is an essential start.
As the pandemic rolled on, many CPOs began this task in earnest with a more central question driving their business thinking – how do we reassess the balance between costs savings -v- risk of non-supply, particularly for our overseas based DIRECT supply lines? Some confessed to having to unravel some one-eyed purchasing decisions of the past – price driven buys, at the risk of non-supply due to complex or elongated inbound supply chains.
No less difficult is deciding on a new strategy – onshoring, near-shoring or just building stock? Single-sourcing, dual-sourcing or multi-sourcing? The Economist research reported in June 2022 suggested the Forbes Top 3,000 companies had increased stock by almost 50% at a substantial aggregate cost of $1trn or more. Little wonder prices are rising. And, what happens when this stock is ultimately released (dumped) into market? They concluded that risk-mitigation is best served by spreading risk (multi-sourcing) not concentrating it (building stock).
Taking a step back and re-evaluating sourcing decisions against new criteria (security of supply not so much cost) seems an obvious move for many CPO’s now. Less obvious is taking the chance to multi-task this re-evaluation by including supply chain mapping down to Tier 3 suppliers, auditing ethical supply chain and modern slavery questions, measuring environmental outputs and driving up supplier governance & compliance standards.
Even less obvious might be a new challenge, fresh from recent high-profile examples in several countries. Organised hackers taking control of major organisations systems and data – raising the spectre of supply chain ‘data’ security becoming a critical element in future? Your supply chain is only as strong as its weakest supplier. How vulnerable is yours?
Inflation rates in late-2022 soared past 7% in many countries, including the US, the UK, South Africa Australia and New Zealand. Indeed, more than half the countries in the world reported in excess of 7% inflation rates during Q4 2022. The rate of 7% is mathematically significant – at this rate CFOs face the prospect of mathematically doubling relative cost (and halving purchasing power) within 10 years or less or significantly faster as rates rise beyond this.
Moreover, with the nature of current inflation being “COST-PLUS” orientated, ‘C’ suite pressure on procurement is growing to mitigate the effects of high inflation for their organisation.
Buyers are working hard to add to their toolbox of options to help manage down rising costs – - especially when so many working in the average procurement team today have never previously worked during genuinely inflationary times.
Yet chasing savings targets in periods of higher inflation rates is a daunting task. As one junior buyer tersely summarised recently, “You try asking for a discount with inflation at over 6%.”
But has one resources sector CEO in Australia’s west was quoted saying to their CPO in late 2022, “we are in a post-savings era now; what matters to our business is ensuring supply-lines so we can service our customers; not shaving supplier’s prices.” He went on to add that he still prized ‘cost-avoidance’ though.
But the challenge for buyers is to find new sources of value for their organisation beyond simple savings. Reducing risk, improving ESG standards and even driving up compliance count – as long as they are valued by stakeholders and, to some extent, are contributions that can be measured at least in part.
However, a real challenge for procurement might be to deliver more practical value than the macro platitudes of reducing risk, building compliance, etc … To actually deliver more tangible outcomes form working closer with suppliers to mitigate the effects of inflation on the supply-side. Suppliers are the true cost experts. - knowing where true cost (and margin) resides. And if buyers and sellers work together as a team – against the common enemy of waste – much more can be achieved to manage down the effects of inflation.
This approach can deliver a much more practical range of deliverable micro benefits that count as ‘value’ and are naturally more measurable. Examples might include working together to target more specific objectives that grow ‘value’ more tangibly for your stakeholders, especially in the DIRECT space, for example:
Reduced product liability rates
Higher stockholding by supplier’s or larger standby or impress stocks
Higher quantity ratios for the increased cost
Delivery preferencing over other clients
Guaranteed DIFOT rates and improved MTBF rates
Enhanced services and greater supplier-side work contributions
Better payment terms or supply chain finance options
Annual price reviews not seasonal reviews
Innovations and new product trials .…
Of course, this challenge is compounded by the deglobalisation trend. Sourcing nearer or onshore to assure supply lines might make costs rise and negotiating more value difficult.
Delivering on ESG
As much broader ESG considerations have replaced the narrower CSR (corporate social responsibility) questions over recent times, organisations both large and small have looked to the supply-side to manage their obligations – both mandatory and self-imposed.
In fact, such ESG considerations are becoming a prerequisite for acceptable business, before even discussing the numbers with any vendor. Are they a suitable supplier to our organisation? Do they share our values and goals? Can we rely on them to do their part on ESG, regardless of commercial merit? What will stakeholders and consumers think? Can they help us retain our social licence?
Stakeholders are much more interested in provenance nowadays and presently are in no mood for compromise. Covid has only exacerbated these concerns. So, ESG considerations are only getting firmer and vendors are expected to ‘comply’ with customer policy if they want to become suppliers. ESG was an afterthought in the past, today a prerequisite that needs to be taken seriously by suppliers as much as it is by their customers and their ultimate consumers.
At the same time as ‘rebalancing’ questions of cost benefits v risk patterns, we have to recognise the obvious questions facing the supply-side in 2023 from rising compliance demands, tighter processes and greater environmental, social & governance (ESG) corporate requirements. Today, these are very real business challenges and often hugely valued by your broader stakeholders and, ultimately, by consumers.
Yet, the procurement challenge is not just to implement higher ESG standards on the supply-side, but, actually, to measure the associated benefits and impact from them. Often, this is no easy task. How exactly can you identify tangible or measurable reductions in emissions, reputational risk and non-compliance? How do we measure impact of reduced emissions, safer working environments, indigenous community support or social procurement initiatives?
The challenge of proactively sanctifying the supply-chain is made no easier by the twin-test of breadth and depth; firstly, the broad, or “dizzying range of objectives” as The Economist described them in July 2022, falling under the corporate ESG umbrella and, secondly, the sheer depth of your inbound supply chain reaching through multiple tiers of supplier’s suppliers; three tiers of inbound suppliers is universal, five normal, seven unexceptional and nine or more surprisingly common. Fair Trade famously mapped 17 tiers of supply in their original Fair-Trade Chocolate project – from cocoa beans being grown in the Ivory Coast to chocolate bars in your local 7/11 convenience store.
Cancelling down the broad spectrum of ESG objectives into a narrower, more focussed and more relevant set of clear and achievable objectives is very difficult. Mandatory ESG requirements must be met by jurisdiction (eg: The Modern Slavery Act in three countries, the BBBEE acts in South Africa, the Australian Payment Times Reporting Act, UK Bribery Act, buy-local policies) and policy aims also have to be honoured (Net Zero targets, indigenous procurement targets, supporting small suppliers, procurement governance rules). Optional initiatives falling under the ESG banner are rare, since any large organisation has a naturally wide range of stakeholders pressuring for change or improvements on a multitude of topics.
The challenges facing professional procurement in the post-pandemic era have perhaps never been greater. And these four generic challenges for immediate attention in 2023 are not the only ones procurement leaders will face – their own organisation’s being more than capable of piling on their own priorities as well.
Worse, anecdotal evidence suggests that procurement team size remains largely static due to skills shortages, lower savings rates and budget pressures in many places. Moreover, a perceived gap in procurement capability between ‘required’ capability and ‘actual’ capability might be wider than many think – it is along time since buying teams have worked in high inflation business environments or faced post-global pandemic supply issues.
Procurement training rates have been low during Covid and, anecdotally, too low in previous years. Annual global CPO surveys by Deloitte over the last decade have long asserted that fully half of POs think that their teams do not have the skill base to deliver their strategy.
Inevitably, procurement leaders will need help and support. Specialist help can directly support the three prime levers of raising procurement capability – people, process and technology.
Yet, today, new capabilities exist in the market to support procurement teams that are increasingly generalist in nature. For example, one-category specialist consultants can step-change category strategies. The Big Four consultancies (or their procurement competitors) can help step-change strategy and contribution. And local in-market consultants, contractors or outsources can offer domestic procurement teams real-time, low-cost reach up the supply change into remote markets.
Ultimately, though, the immediate challenge for procurement leaders in 2023 is little different to the challenges of the past at a fundamental level - prioritise your objectives and then win internal buy-in to get the support you need to implement your strategy.
Jonathan Dutton FCIPS is the CEO of PASA in Australia, and write a monthly column for Supply Clusters in a non-executive role. He is also a regional non-executive for Axis Group. He has a long career in and around procurement as a practitioner, leader, consultant and trainer and has also worked extensively in the past in sales & marketing roles www.jdconsultancy.com.au