To manage supply side risks, CEOs must bring procurement to the frontline
The impact COVID-19 on life and business is diverse, fast-moving and potentially hard to preempt. Even as organizations move from crisis management to recovery planning, new uncertainties crop up every single day. Quite a few fundamental truths are evolving, leading to potential seismic shifts in what it will take to win for the evolving consumer and business landscape of tomorrow.
At the heart of building or regaining the capability to win is supply management. And this is because it is core to crisis management and even more critically core to recovery planning. As part of a Kearney survey in March 2020 we interviewed 100 senior procurement professionals across multiple industries from all over the world. More than 70 per cent of the senior executives affirmed that procurement is getting elevated to play a front-line role in managing supply side risks. Given that the full impact of the COVID-19 crisis is still unknown, in the times ahead procurement leaders will have to intelligently juggle crisis management and post-recovery plans.
We believe the following 10 key imperatives should guide every CEO’s decision.
- Rethink your category moves, category strategies – Your category strategies and moves can be an unprecedented source of competitive advantage in the medium term. Identify categories that you will go after now, and these should not just be the obvious ones linked to crude oil (packaging, fleet) but also categories such as media, marketing, promotional items, displays, events where the nature of demand or supply has changed significantly and is here to stay
- Challenge not only material but also service specifications, now more than ever – This should include specifications regarding equipment repair and maintenance, MRO, facilities management, office supplies, AMS contracts. The true value of profitability can be unlocked not only from commercial negotiations, but by challenging every ‘gold’ standard, unchanged for 20+ years in service specifications
- Ensure your supply base is refreshed – Digitalization is here to stay. Predictive maintenance, digital point-of-sale materials, and digital event management call for a unique set of capabilities. Time to ensure that at least all your large suppliers are integrated.
- Give procurement a seat at the table when thinking of digital investments for the future – Good, strong teams have the best sense of solutions, services provided by vendors, and therefore, should be put at the forefront of innovation from a supply perspective.
- Move from supplier performance management to supplier relationship management – Identify your key partners, your mega suppliers, and define tiers or levels of partnership. Have open book P&L discussions with these key players and reset terms of engagement. Engage in supplier sentiment analysis, use digital tools to stay connected, and leverage these suppliers to help manage your tail.
- Invest in commodity price risk management -– It is essential to differentiate crisis management from risk management and build capabilities for each. Leading organizations are already bolstering their commodity price risk management toolkit, either via building it in-house, or the more recommended path for those without scale – outsourcing this to specialist agencies
- Make virtual negotiations a part of the deal: Businesses should now prepare to engage with their suppliers through virtual supplier summits, knowledge sharing forums and crowdsourced solutioning. For instance, Virtual Supplier Days is one of the most powerful tools for negotiation and value unlock. Suppliers are brought together with a common brief, and parallel collaborations, negotiations are done over the course of a day. This technique can result in 3x cost savings vs traditional means of negotiations.
- Accept global islandization as a real possibility – Quantify your exposure to a global vs. local spend base (not only for your raw material sourcing but also your discretionary spend), identify local alternatives, approach the market
- Get an outside-in, unbiased view of a zero-based budget – The predominant model is for the Finance team to anchor this and for the business to challenge it. Most successful organizations, however, prefer to elevate their Procurement teams for an outside-in view. This way the gaps show up in a very visible way and precise areas of fat can be easily trimmed.
- Focus on other strategic plays:
- Supplier acquisition – Broaden your M&A strategy to include plays towards backward integration across industries.
- Partnerships/consortiums – Evaluate your partnerships, especially for categories, when your organization spend is likely to go down.
- Advance buys – If there isn’t a cash crunch, evaluate your advance buys especially for media, communication. There is a lot of arbitrage possible in this space if you act now.
Don’t underestimate the power and impact that procurement can have on generating shareholder value. Now is the right time to bring it to the frontstage and put it under the limelight. To play to win, you must ensure that procurement is your protagonist.
Saumya Krishna is Principal, Kearney.