Managing Global Procurement and Supply ‘Risk & Cost’ in the Resources Sector can be challenging. We live in uncertain times and international supply chains are shifting and stressed, while costs are rising. Axis Group Global Procurement & Supply has supported mining projects and operations for over 20 years and we share insights & lessons learnt now that global developments have elevated procurement and supply chain as a key value driver for resource companies around the world.
Date: 27 September 2021
- Global supply chains have been redefined with increased risk and turbulent change and thus disruption is now characteristic of many supply chains across regions and industries
- The resources sector is no different: security of supply, delays in logistics, schedule impact, inventory costs and price risk are common
- There is the pressing need for resource companies to actively manage ‘risk and cost’, logistics and many complex variables related to global supply
- Successful companies have a clear global sourcing strategic intent and execution focus
- China continues to stand out as a prominent cost-competitive supply market and getting China’s sourcing and procurement right remains a priority
- Selected alternative lower-cost markets are emerging, but still developing as a future opportunity, e.g. India, Vietnam, Thailand, Poland, Czechia and Mexico
- Mining companies that make solid ‘supply cluster & category’ choices do consistently gain advantages and de-risk their supply chains
- Local content priorities and considerations must be integral to all global procurement planning to bring balance across the entire spend profile
- ESG objectives, e.g. combatting Modern Slavery and pursuing environmental goals, must be integrated into global supply planning and execution
- Leadership from the top, capex project governance and supply team skills and capabilities will largely determine procurement and supply outcomes
- Partnerships are strategic levers and pivotal to success in managing complex end-to-end global resource sector supply chains
Priorities for Procurement & Supply Leaders in the Resources Sector
- Frame Robust Global Sourcing Strategy & Execution Framework:
- Strategic intent
- Leadership & Governance support
- Representative team across organisation
- Partnerships that work
- Exemplary execution
- Analysis and decision-support
- Validation to de-risk
- Implementation & change management
- Strategic intent
- Get China Right
- China supplier relationships management
- Leverage on-the-ground presence
- Joint ESG objective setting
- Quality, inspection and expediting
- Solid logistics management
- Explore New Markets
- Leverage strategic intelligence, data and analytics – calibrate risk & cost
- Develop team capabilities and reach
- Smart ‘Supply Cluster & Category’ Choices
- Match appropriate categories to local procurement options, incumbent suppliers and emerging supply markets and suppliers
- Learn, phase activity and stage risk-taking to make bigger strides and impact over time
Global conditions elevate risk in supply chains
Globalisation, which redefined global trade and business in the last century, was already starting to lose its sheen prior to Covid-19 with a multitude of risks converging. Brexit and a trade war between the two largest economies in the world, showed a new phase of inward thinking when it came to global trade. Latest and fast evolving technological and environmental landscapes were starting to impact industries at a rate that had not been seen since the first industrial revolution. Then, the situation was exacerbated by something unthinkable, the ultimate ‘black swan’ – a global pandemic that crippled the healthcare infrastructure throughout the world and forced most of it to go into full or partial lockdowns for more than 18 months already. This multitude of risks converging, has increased the pressure on global supply chains. Refer to figure 1.1.
Stressed Global Supply Chains
Supply chains have been particularly impacted by international shipping costs, reaching their all-time highest levels (figure 1.2) after the pandemic begun and are showing no signs of slowing down. This has been caused by a multitude of factors. Severe congestion at major global ports, shortages of containers and delays in inland logistics due to a shortage of truck drivers, have all multiplied the already soaring ocean freight rates. In these charts, freight costs between certain ports have seen price increases of 5-7 times the usual rates; as well as the ratio of vessels arriving on time falling to below 40%, causing major security of supply concerns.
Costs Up & On-Time-Arrivals Down
The current global landscape has made managing procurement and supply a riskier and more complex undertaking across all industries. Numerous recent headlines have outlined the impact of supply chain disruptions and examples include: ‘Chip shortage causing Ford to slash vehicle production’, ‘Aluminium prices hitting 10-year highs’, ‘India’s second wave causing severe global covid vaccine supply chain disruptions’ and ‘Apple lowering growth forecasts as chip shortages reaches iPhone’.
These disruptions have impacted all sectors, including resources. Determining viable global supply clusters; matching spend categories, products and packages to appropriate suppliers; and ensuring a sound and robust procurement and supply process and infrastructure requires an innovative approach to navigate through this era of increased interconnection and turbulence.
Resources sector supply chains are challenged
Indeed, our resource clients share with us that they too have not been immune to the various challenges faced by global supply chains. If not managed carefully, these risks have a significant impact on both the development of new and the operation of existing mines. Refer to figure 1.3
Resources Sector Supply Chains Reflect Global Risks
Shipping delays, security of supply concerns, price escalation and the need for costly inventory holding are a few of the unwelcome outcomes that resource companies are experiencing. Supply from certain regions or suppliers have been particularly affected – and stand to be more disrupted.
Managing supply chain visibility has become harder and gauging supplier health is now very important. Additionally, ESG objectives become more challenging to meet and the forces that drive an increase in Modern Slavery are more common in many supply chains due to widespread economic fallout coinciding with the inability to visit suppliers for audits (due to lockdowns and travel restrictions).
With the multitude of risks converging in global supply chains, the question of managing cost also arises. Decisions to ‘pay more’ in order to reduce risk (or lead-times) have become common. But is this sustainable? Global resource sector companies have become reliant on opportunities presented by the China supply market. This should be no surprise considering that China has significantly increased its capabilities over the last two decades and yet remains extremely cost competitive. There are however other manufacturing markets that compete with China’s cost competitiveness. Refer to figure 1.4
Cost Structures Differ Across Supply Markets
So it becomes necessary to merge the risk considerations, that we mention above, with these cost profiles. The implications are that resource sector procurement and supply managers are faced with a set of tough choices on ‘Supply Clusters and Categories’. For example, note that there are some emerging cost advantages in Mexico, India, Vietnam and Poland. Do these offer realistic alternatives? We will expand on this later in the paper.
Where there are risks, there are opportunities
Over the last ten years, we’ve observed growing potential in new markets for spend categories that are relevant to the resources sector. These include countries such as Poland, Czechia, Mexico and India; however, we do not envisage any of these markets individually challenging China any time soon in a serious manner on typical spend categories.
We do expect costs and risk to slightly increase in China over time, however, the world’s leading supply market will remain highly attractive as a competitive ‘one-stop shop’, and a globally integrated option for the resources sector. Resource companies focused on cost, quality and speed will need to develop improved methods of working with their Chinese suppliers. Parallel to this, new supply markets collectively are making up a new pool of supply and several need to be nurtured – in multiple jurisdictions – to de-risk the global supply chain and take advantage of the next big opportunity.
To solve the challenges of driving global procurement effectively, we propose a new look at the approach companies take to: (1) Global Sourcing Strategic Intent & Execution, (2) Working with China, (3) Investigating New Markets that Matter, (4) Supply Cluster & Category Choices.
1. Global Sourcing Strategic Intent & Execution
It is essential that senior leadership buy into the benefits of global supply and that there is a clear link back to corporate objectives. The global supply strategy must be deliberate in terms of which products, from which markets and working with which suppliers. A sound governance structure needs to be in place to maintain momentum and provide guidance such that expected benefits are unlocked.
At an execution level, we advise a process of spend analysis, supply market validation and then a considered implementation with strong change management.
Implement Appropriate Global Sourcing Strategy & Execution Framework
Alternate global sources of supply will de-risk the supply chain but will also create more complexity. Working with the right partners will allow you to continue to focus on your core operations.
Key interventions should be done by qualified partners to de-risk along certain points of the supply chain. Supplier selection, quality management, modern slavery audits and expediting, to name a few, are essential tasks to undertake, with further emphasis on these interventions being required due to the current disruptions global supply chains are facing. In figure 1.6 we look at a typical supply chain for a resource company, and what needs to be done to mitigate any disruptions from supplier all the way to the customer.
These value chains are complex to manage (figure 1.6), with many interventions that need to happen to get products moving from supplier to the mine or process plant. The level of complexity is high, but successful organisations do meet the challenge. They also combine the best of global procurement with the goals of supporting local content and inclusive procurement policies.
Resources Sector Supply Chains are Complex to Manage
2. Working with China
It is often asked what the ‘winning formula’ is for effective procurement from China. Successful China procurement is the result of a comprehensive set of complex and highly specialized processes. Distilling this down to a ‘magical recipe’ for success is no simple task and there are no shortcuts. However, as a useful reference, two fundamental ingredients for procurement success are: the selection of the right suppliers; and the effective management of chosen suppliers to optimise their performance.
This is easier said than done, and a closer examination of these two processes is certainly warranted. For a fuller perspective: China Supply Market Potential
Getting China Sourcing Right
- Supplier identification, evaluation and selection is key
- Supplier management, including relationship management, performance management, QA/QC, expediting, inspection and supplier development
- Logistics management can be challenging and must be well-managed
- Understand key product categories that China can offer competitively and know where China has already lost its edge to lower-cost markets
- Establish an on-the-ground presence or work with credible partners to better manage various processes
- Factor in the language and cultural factors and barriers
3. Investigating New Markets that Matter
To determine the full scope of opportunities, we first need to examine the data and associated trends. Key procurement challenges (figure 1.7) along the process of supplier selection and then management, must be considered whilst new markets are tested. A strategic plan must be in place when determining which markets are appropriate and which suppliers are optimal for specific procurement needs – and utilise qualified partners that can provide solutions across the end-to-end supply chain.
Procurement Challenges in New Markets
In figure 1.8, we see how China has risen to be the world’s largest exporter, with USD 2.59tn in 2020. However, there are several emerging markets that appear in the rankings of top global exporters. Mexico, Vietnam, India, Poland, Czechia and Turkey, to name a few, have steadily increased their share of global exports, and are continuing to challenge the traditional leaders.
Meanwhile it is very important to note that Germany, USA, Japan and other developed markets are still renowned for high quality, high-cost products, but the emerging developing markets provide alternatives that are also high in quality but are more competitive in cost. Getting the trade-off right is important and certainly not easy.
New Global Order: Incumbents, Winners and Losers
We present a detailed analysis of these trends in A World of Global Procurement Opportunities – but Where to look?
For further perspectives to deep-dive 2 dynamic supply markets: India Supply Market Potential and Vietnam Supply Market Potential.
4. ‘Supply Cluster & Category’ Choices for the Resources Sector
To look at how these markets are involved in the supply of products needed in the resources sector, Axis Group has developed a taxonomy (figure 1.9) on typical spend categories for mining companies by doing extensive research and leveraging our 20 years of experience. See some of the findings here: Axis Group on Balancing Risk and Cost for the Resources Sector HO
Mining Industry Spend Taxonomy
At the core of this research and through investigating global mining company spend, Axis Group filtered 14 categories – which totaled USD 540bn of global exports last year – that are typically procured in this sector. In figure 1.10, we look at the export growth of our chosen categories for the past 10 years, and the top 20 countries market share of the relevant exports.
China’s Prominence in Mining Categories vs Developed and Emerging Markets
China is a lead exporter for these categories (figure 1.11); however, other ASEAN countries and India can be attractive for resource companies, hence a growing market share for some of these exporters.
In summary, and based on some top fourteen mining product exports, we see a number of possible outcomes:
- China should remain a core part of resource companies’ sourcing portfolio, given its high capability and cost-competitiveness in numerous product categories
- At the high-quality and high-cost end of the spectrum many traditional economies will continue to play a role i.e. US, Japan, Germany, Spain, South Korea, etc.
- India, Vietnam and Thailand should be selectively considered due to their growing capacity in key resource sector categories
- Eastern European countries such as Poland and Czechia should be observed for their growing potential in select categories
- Mexico plays a core role in LATAM and North American supply chains, but has potential to bolster the supply of other global markets
China’s Prominence in Mining Categories via Rapid Export Growth & High Market Share
Beyond the 14 product categories we identified, China and selected emerging markets should also be considered as alternatives to high-cost markets for other resource sector related categories in direct spend. Previously in figure 1.9 we looked at the typical mining company spend tree, where other Capex, Opex/MRO and services were identified to be sourced from these markets, with examples such as:
- Site construction, mine construction and facilities construction related products
- Construction services
- Material handling equipment and consumables
- Processing equipment and consumables
- Bulk chemicals i.e. flocculent and reagents
- Electrical equipment and consumables
- Explosives related equipment and consumables
China is the largest exporter for a number of these categories of products, with figure 1.12 and figure 1.13 looking at the size of its exports in the broader harmonized system (HS) codes. Hence while numerous new markets exist, China should still be a key sourcing hub for procurement managers in the resources sector. This is especially true across electrical machinery and equipment, mechanical appliances, chemicals and reagents, various steel products and rubber products such as conveyor belts.
China’s Exports – World Beating in Resource Sector Procurement Spend Categories (1)
China’s Exports – World Beating in Resource Sector Procurement Spend Categories (2)
Effective global sourcing is by no means an easy task. There are many challenges and obstacles: gaps in team skills and capabilities, information asymmetry, time pressure, complexity, lockdowns, travel restrictions, end-user resistance, change management requirements, standards, etc. Language, culture, distance and views on contracts or managing quality and inspections also enter the picture.
However, current risks and shifts in global supply chains make it imperative and a priority for resource sector procurement managers and teams to get it right.
When done effectively, global procurement and supply present a powerful lever for driving value in the resource sector that can reduce cost, manage quality, expedite schedules, mitigate risk, and ensure important ESG compliance across the supply chain.
Benefits of Effective Global Sourcing During Times of Uncertainty
- Cost-down and value generation
- Right-sizing inventory targets and management – and limiting working capital impact
- Security of supply
- Quality maintained and managed
- Schedules expedited, de-risked
- Risks managed and mitigated, and future proofing
- ESG compliance and goal scoring
Imagine the entire world was your supply marketplace?
Axis Group Global Procurement & Supply has supported mining projects and operations worldwide for over 20 years. Our solutions are truly integrated and span the entire international value chain from source to final supply – including analytics, sourcing, procurement, supplier performance management, quality management, inspection, expediting and logistics.
If your project or operations are challenged by unacceptably high costs, extended lead times or risk, we can provide additional capability. Reach out to Axis Group International in Australia, Asia or Africa at email@example.com or call +61 483 386 118.