supply chain

Today’s Supply Chain Challenges and What Procurement Can Do to Solve Them

by Rachel Garcia, Principal Consultant, Mike Kerr, Practice Director – Supply Chain & Procurement, Mike Johnston, Managing Consultant

The vital role played by procurement functions has come to light over the past 18+ months.

Covid-19 has disrupted businesses and put a major strain on global supply chains. The impacts of the pandemic have tested the resilience and effectiveness of supply chain organizations as they have faced a wide range of challenges, including:

1) Supply Chain Disruption

At the onset of the pandemic, many major production centers were closed due to worldwide lockdowns which led to major disruptions across manufacturing. Transportation and travel restrictions also had a substantial impact on the performance and efficiency of supply chains. The shutdowns and the travel restrictions disrupted global supply chains and often required procurement organizations to source from alternate suppliers.

2) Changes In Demand

Consumer behaviors changed with restrictive policies, shutdowns, and financial distress. In the U.S. for example, consumers took the money they normally spent on restaurants and vacations and re-directed it to goods for their homes, which suddenly doubled as offices and classrooms. The skyrocketing demand for these items have caught many manufacturers off guard and further exacerbated the supply chain crunch.

3) Spikes In Pricing

When the pandemic first started to spread, economies were impacted, and panicked consumers stockpiled raw materials. More recently, the rapidly recovering demand is leading companies to stockpile raw materials and buy more than they need. As a result, the panic buying has led to large supply shortages which has driven up prices significantly

4) Financial Distress

Many manufacturers and suppliers were impacted by the financial stress from the pandemic. Distressed and troubled manufactures often struggle to meet contract requirements which can have ripple effects across the entire supply chain.

5) Labor Marke

Difficulties in hiring have intensified supply chain disruptions. Companies across all markets are facing worker shortages. Forced shutdowns at the onset of the pandemic caused a significant drop in employment levels. Manufacturing and distribution have especially struggled to retract and attain talent as consumer demand has increased which has further stressed the supply chain.

As businesses look to overcome these challenges and ensure they are more prepared to mitigate risks and disruptions in the future, they will want to gain more visibility and insight into how and where cash is spent. A procurement function with mature spend capabilities makes it possible for organizations to identify opportunities to reduce costs and improve reliability across markets, suppliers, and prices.

So, what does it mean for an organization to have mature spend capabilities? At the very least, procurement team members should be actively monitoring where purchasing dollars are flowing to combat duplicative spend, maverick spend, and non-PO purchases. High levels of transparency should be present across supply markets, categories, sub-categories, and locations. While this notion sounds simple in theory, it’s much more difficult in practice. Data integrity is a persistent roadblock for many procurement organizations. Lack of well-defined policies and controls, in addition to multiple ERP systems can lead to disparate sources of the truth that prohibit category managers from identifying real opportunities for spend reduction. Companies that have achieved a high degree of data integrity have done so through clearly defined spend policies and controls, as well as by integrating PO, invoice, AP, and GL accounts to present a multi-dimensional view for Procurement and Finance.

The next levels of spend maturity that we’ll discuss looks beyond descriptive analytics, i.e., how much did we spend and where, and keys in on mechanisms to build a more resilient supply chain in the face of future disruptions. At its peak level, this includes the use of predictive analytics, which identifies trends that point to future outcomes, and drivers of future outcomes, so that procurement functions can make proactive buying decisions. This sort of capability, while ideal, often requires significant investment in data, technology, and in-house talent/skills.

A more cost-efficient and attainable mechanism to mitigate supply chain risk is to invest in vendor management capabilities, or a Vendor Managed Office (VMO). Traditionally a VMO has had to manage a large amount of manual recording, tracking, and reporting in a very manual and non-integrated manner. Over the last 3-5 years there have been emerging technologies developed that automate these tasks and activities, provide additional and tailored insights, and support the risk and governance aspects of vendor relationships. For example, with a relatively minimal investment, a company can assess the effectiveness of the contractual metrics, revise the metrics to incent appropriate supplier behavior, and develop the ability to trigger recommended actions according to key terms in supplier agreements. A well-managed VMO should also have in place a formal supplier performance function that tracks supplier profiles and their reliability during times of crisis and distress. This includes putting in place processes, procedures, and dashboards that enable tracking of supplier performance risks, as well as corrective action plans to mitigate these risks once identified.

Now more than ever, companies are reliant upon their procurement functions to provide multi-layered spend visibility and use the resulting understanding to make better decisions. The task at hand is not a simple one. Procurement leaders must strike the correct balance of internal data (spend, cost, contractual metrics) + external data (geo assessments, risk analyses, alternative supply sources) to achieve spend efficiency without sacrificing supply chain resiliency. While difficult, the right approach is to be honest with where your procurement team stands on the maturity curve and set achievable short-term goals that enable a more holistic view of the company supply chain.