Three new challenges for procurement in 2023 … or sooner
July 29, 2022, By Jonathan Dutton FCIPS, CEO at PASA
Regular columnist, Jonathan Dutton, offers Supply Clusters members a sneak preview of what’s ahead for Procurement now we are slowly emerging from the Covid pandemic era and head towards 2023 and also reveals the theme for The 10th Annual PASA Premier CONFEX LIVE in Melbourne, 12-13th October 2022:
Procurement during Covid
Procurement had a good Covid. Stakeholders saw a new sense of urgency, strong alignment to immediate business needs and a new role for procurement pathfinding the way through corporate process to better, faster outcomes. All whilst working from home – perhaps even proving the old adage of the ‘paperless office’ can be a reality?
Not everything went perfectly during the pandemic of course – incomplete business continuity plans were found wanting, supply side shortages and bottlenecks are ongoing, new requirements (like PPE) were operationally imperative, information from systems was often proved incomplete or out of date and pausing existing supply agreements quickly became tricky, as needs changed fast.
The Covid pandemic proved again that we live in an increasingly complex and volatile world – a volatile, uncertain, complex and ambiguous (VUCA) world in fact, as watching the TV news illustrates nightly.
This VUCA environment makes global sourcing strategy increasingly difficult to execute professionally in a way that optimises cost advantages against supply assurance - particularly from overseas suppliers into Australia and New Zealand (ANZ) located at the very tip of the global supply chain. And, especially, during a time of such turmoil during a global pandemic and its ongoing ramifications.
So, the COVID-19 crisis really highlighted how much Australian and New Zealand rely on overseas supply lines. Domestically, in Australia, we are a service-based economy – with around 70% of local GNP generated from services and only around 9% rooted in manufacturing onshore. So, we import much of what we consume in Australia (and New Zealand); leaving us especially vulnerable to others’ problems around the world such as wars, natural disasters, supply chain bottlenecks, global pandemics, economic pressures, inflation, pirates and, even, also increasingly, tariffs & trade wars and geopolitics. And exposed to all of their consequences, both direct and indirect. Covid underlined these risks big time.
Six Challenges facing Procurement in 2022
Previously, at PASA, we had identified six challenges for procurement for 2022, emerging from the pandemic in a PASA white-paper from January 2022, discussed in detail by the PASA CPOs Roundtable over subsequent weeks:
Three new Procurement challenges for 2023
But, moving forward, THREE new forces are especially prescient for organisations right now, heading into 2023, as we emerge from the pandemic and business works hard to right itself and get back on track.
And each of these three forces is largely acting from the supply-side, putting procurement opportunity into sharp focus; firmer ESG considerations, soaring inflation & deglobalisation impacts:
1. Environmental, social & governance factors (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 business, before even discussing the numbers with any vendor. Are they a suitable supplier to our organisations? Do they share our values and goals? Can we rely on them to do their part on ESG, regardless of commercial merit?
But with such a broad ESG agenda, which seems to be getting even broader, how can organisations ever do enough to ensure stakeholders let them keep their social licence to operate? What can realistically be achieved through procurement alone? And how do buyers prioritise so many worthy initiatives? Are we trying to everything, at the expense of doing the most relevant things well? And can ESG be a primary Procurement deliverable to replace diminishing savings?
Currently, stakeholders are in no mood for compromise. ESG considerations are getting firmer, and vendors are expected to ‘comply’ with organisational policy if they want to become suppliers. ESG was an afterthought in the past, today a prerequisite.
As inflation rates in mid-2022 pass around 9% in the UK, USA and New Zealand, and also escalate significantly in Australia – CFOs face the prospect of mathematically doubling relative cost (and halving purchasing power) within 10 years or less at these rates.
Moreover, with the nature of current inflation being “COST-PLUS” orientated, maybe the ‘C’ suite might imagine that procurement could have a disproportionate influence in mitigating the effects of high inflation for their organisation?
And, if inflation is soaring in more advanced economies, is it possible to source more aggressively from other countries less affected by inflation?
Meanwhile, much of the procurement profession are too young to have experienced buying during inflationary times. Have never really experienced a regular supplier sat opposite in the meeting room and looking eye-to-eye to ask for a price rise - and doing so three times each year. Rapid inflation brings these instances.
Buyers will have to be much more aware of supplier circumstances and much more cognoscente of the oligopolistic market they are buying from – balancing sustainable supply lines with cost growth and mastering the procurement toolbox anew from back-in-the-day to help mitigate the effects of inflation on their organisation.
Deglobalisation is a gradual process of diminishing interdependence between countries around the world, largely through declining economic trade and investment and exacerbated, or even caused, by the myriad of forces listed above in italics.
This trend has notably accelerated through the pandemic as supply chain bottlenecks have become so apparent and, more recently, the effects of the war in Ukraine have spread globally at the same time as economic issues like inflation and commodity shortages have become more pronounced.
In sourcing terms, internationally, we are maybe reaching a point where regional ‘trading blocs’ are re-emerging as countries strive for strategic autonomy? Russia and its allies increasingly trading alone, the EU becoming more insular post-Brexit, the UK presently somewhat isolated, America more concerned with domestic issues than international ones, China proving more awkward to work with?
Fuelled, maybe, by the rising profile and influence of groups of nations such as the G7, ASEAN, APEC, BRICS, AUKUS, The Quad and others? What does this all mean for genuinely global sourcing – from ANZ at the tip of the global supply-chain? Or does this now mean we will increasingly be restricted to sourcing more domestically, or more from certain preferred nations and trading blocs over others? Or, simply to rebalance RISK and COST individually for every critical overseas sourcing decision and supply line?
Indeed, has “lowest cost” sourcing strategy already simply given way in 2022 to “most secure” sourcing, from either single or multiple suppliers? Supply-resilience more important that best-margin, in a world of growing shortages?
Lean supply chains have been attractive for the last two or three decades, but the total cost can be crippling when they fail. The Economist 24th June 2022 reports global inventories for the largest 3,000 firms have grown by 50% last year from 6% to 9% of world GDP and that, “the West is seeking long-term supply deals from allies rather than relying on spot markets dominated by rivals.” It concludes that supply, “resilience comes from diversification, not concentration.” Maybe the biggest firms have taken the easiest option for security of supply – boost inventory. Yet The Economist points out, “security of supply is truly found in diversification not concentration” – a key point for any supply strategy in 2023, surely.
Other procurement pressures
Of course, in addition to these THREE main forces set to challenge us in 2023, other factors that have altered procurement’s course both before and during Covid have not gone way. In many ways, they have laid the groundwork for our changing profession in recent times;
the strengthening of stakeholder relations during the crisis,
the reality of the paperless office, when working from home,
the limitations of eProcurement systems and potential of digitalisation,
the increase in governance requirements,
the rise and rise of Agile Procurement
the power of SRM
pressure to support small suppliers, and the Payment Times Reporting Act,
global supply chain failures,
the reality that savings tend to zero over time, the ‘low-hanging fruit’ already harvested
So, what does the future of strategic sourcing truly look like? How is our profession set to change – away from a myopia on savings? Working for broader outcomes? A new focus on supply risk? More agile? Certainly, measured to a new strata of expectations …. In other words, after covid, … it’s all different now. ….
Footnote: Why it’s all different now … The 10th Annual PASA Premier ConFEX 2022 in Melbourne on 12/13th October, is set to be the largest Procurement conference in the country this year, complete with ‘The NIGELs’ procurement excellence awards, and an event to follow the tradition of PASA annual conferences always being ahead of the curve on thought-leadership, innovation, relevance, value and practicality. Each speaker at The 10th annual PASA Premier ConFEX this OCTOBER 12-13th will address this theme either directly or indirectly. And with over 30 contributors in a packed two days, we are sure to address enough topics directly relevant to you and your organisation. Tickets are available from 1st August, and the first 150 procurement practitioners get FREE tickets to attend in person: Just google ‘PASA EVENTS’ or head online to https://procurementandsupply.com/
Jonathan Dutton FCIPS has a non-executive role at SUPPLY CLUSTERS and writes a monthly column for the website. Jonathan is the CEO of PASA who run a wide range of procurement conferences, events, industry Roundtables and training programmes each year