Time to reshape procurement to meet a changing landscape and new board expectations
As we move into another year of extreme uncertainty, the glare of CEOs, boards and wider executive committee members will become even more focused on supply-side risks and opportunities.
One of the starkest findings from recent research carried out by Procurement Leaders and our sister organisations World 50 and G100 (both serving C-level executives of Fortune 500 companies) is that 98% of the near-200 respondents believe current shortages will last longer than six months. Almost half believe they will last for between one and three years.
Shortages come in many forms – materials, logistics, equipment, energy, labour – but the emerging picture is that scarcity is we must learn to live with, to build into our capabilities and approaches, rather than something leaders can throw short-term fixes at.
This is a pivotal moment for procurement executives.
In July 2021, when we pulsed our CPO community about the relationship with their CEO, 42% said it had become much stronger due to the impact of Covid. This was before the worst of the shortages we experienced during the second half of 2021 had made an impact and before COP26 shined an intense spotlight on organisations and their efforts to reduce Scope 3 emissions.
As we step tentatively into 2022, there is no doubt that board expectations of procurement and the supply base have intensified. As a result, the function has the opportunity to shine even brighter than it has since the start of the of Covid-19 pandemic.
One CEO who responded to our most recent study into the scarcity economy summed up the challenges many organisations are facing when they said that they were dealing with “extremely unpredictable supply chains” with “very long” lead times that are stretching to anywhere between 13 weeks to a year. Vendors are also breaking commitments while products sitting at ports, waiting to be unloaded. And that wasn’t to mention the difficulties they are facing sourcing semiconductors.
Another C-suite respondent in general management said that scarcity across the organisation’s global sourcing efforts was leading it to look at changing up the “core supplier mix”. Another CEO, meanwhile, said their company was having to pay significant premiums to buy on the open market, “constantly” getting pre-committed orders reduced and was seeing some timelines for orders moving from 0-12 weeks to more than 46 weeks.
The point here is not that these issues are particularly new in the context of the past six months, but that the focus of C-suite thinking has moved deliberately and obviously upstream. More than ever, CEOs and boards are obsessed with suppliers and the supply chain. And this is for both risk-based reasons and longer-term strategic planning.
The bigger picture
When we look at some of the issues facing global business leaders, it’s not unreasonable to suggest that we will experience some subtle yet significant shifts in business strategy in the coming years; shifts driven by a heady combination of supply chain risk, geopolitics and sustainability. These are all subjects of intense boardroom scrutiny, they are also all directly related to procurement.
There is no doubt that the need to double down on risk in the supply chain is a potential driver of business model change for entire industries, following decades of evolution that have resulted in incredibly lean supply chains without an ounce of inefficiency. For the manufacturing industries, the holy grail of globally sourced, just in time supply has separated winners from losers and led to the pendulum swinging somewhat away from risk towards efficiency.
But there are already signs that organisations are beginning to act, with one CEO saying that they would be “re-sourcing, changing vendors and reshoring” while developing alternative secondary and tertiary suppliers. Another said they would be extending the organisation’s “duplicate supply chains in the US and Asia”. Another chief executive was even more frank, admitting that the company would diversity its lines of business to be “less dependent on certain aspects of the supply chain”.
A clear risk-based approach to supply chain design and product portfolio management is emerging, which is leading to organisations looking into more local sources of supply, designing or rationalising product portfolios with risk and resilience in mind, building up reserves of inventory as a buffer, and even duplicating supply chains.
Add the headwinds of geopolitical tensions to the risk element and some of the drivers of the above shifts are further intensified. Duplicating supply chains to allow for greater management of supply-side risk in a world of shortages and disruption is a worthy strategic debate, but add the fuel of geopolitical tensions and it takes on a whole new dynamic – reshoring becomes much more than mere risk mitigation.
And then, to complete this already challenging picture, we can add the spectre of climate change and sustainability, an area in which procurement – if it’s not already – must drive deliberate and meaningful improvement within the supply base.
Suddenly, boards and investors are acutely interested in procurement and supply chain – at least, more so than they have ever been.
The road ahead
As a function, there has never been a time when procurement has been more in the spotlight than it is right now. Surging inflation, supply shortages and disruption can be added to increased regulatory scrutiny, geopolitical pressures and a demand for transparency and traceability to create a backdrop of intense pressure for companies the world over.
Thankfully, there are a number of weapons in the procurement arsenal that will be dusted off and primed to help us navigate these turbulent times, with procurement and supply chain executives often bullish about the opportunity to address the challenges that lie ahead. Strategies being deployed range from accelerating relationship building with key suppliers, investing in automation, adjusting product specifications, diversifying the supply base, as well as duplicating supply chains, reducing their length and complexity.
As one CPO said: “We are shaping disruption by reducing the supply chain footprint, reducing the number of nodes in our supply chains, qualifying local sources and multi-sourcing.”
These are responses to a changing global business landscape that is changing for the mid-to-long term, rather than tactical moves to deal with short-term volatility. As another CPO puts it, “We’re taking another look at key sourcing strategies in light of the new landscape that we’re dealing with over the next several years”.
And this is the point. The global landscape has shifted, and procurement and supply chain management are fundamental to reshaping business models and operations in response. Procurement’s time is now.