In a post-Covid-19 environment, understanding global markets remain difficult due to new upheavals that are occurring, and challenges continue to linger for those in the procurement profession. Below, Jonathan Dutton FCIPS, principal at JD Consultancy and CEO of PASA, gives his insights on how to overcome these problems in 2023.
Procurement during Covid
The procurement profession had a good Covid. Internal stakeholders saw a new sense of urgency, strong alignment to their immediate business needs and a new role for procurement pathfinding the way through corporate process to better, faster outcomes. All whilst working from home whilst proving that the ‘paperless office’ can be a reality.
Suppliers played their part. A new level of co-operation and teamwork, assiduous Covid-safe plans and compliance, flexibility on outstanding contracts and goodwill on temporary agreements.
Yet not everything went perfectly during the pandemic, of course – incomplete business continuity plans at many organisations were found wanting, supply side shortages & bottlenecks seem ongoing, new requirements (like PPE) were operationally a new imperative for most, information from systems was often proved incomplete or out of date and pausing existing supply agreements quickly became tricky, as needs changed fast.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 businesses 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. And for many others outside Australia too.
Four new Procurement challenges for 2023
But, moving forward, FOUR new forces are especially prescient for organisations supply-side management right now, heading into 2023, as we emerge from the pandemic and organisations everywhere work hard to get fully back on track.
- 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 acceptable business, before even discussing the numbers with any vendor. Are they a suitable supplier to our organisation? Do they share our values and goals? Can we rely on them to do their part on ESG, regardless of commercial merit? What will stakeholders and consumers think? Can they help us retain our social licence?
Examples of many organisations ESG agenda include both compliance matters (The Modern Slavery Act in three countries & Australian Payment Times Reporting Act, buy-local policies) and policy aims (Net Zero targets, indigenous procurement targets, supporting small suppliers, procurement governance rules).
Stakeholders are much more interested in provenance nowadays and presently are in no mood for compromise. ESG considerations are getting firmer, and suppliers are expected to ‘comply’ with customer policy if they want to become suppliers. ESG was an afterthought in the past, today a prerequisite that needs to be taken seriously by suppliers as much as it is by their customers and their ultimate consumers.
As inflation rates in late-2022 soar in the UK, USA and New Zealand, and also escalate significantly in Australia as well as many other countries – CFOs face the prospect of mathematically doubling relative cost (and halving purchasing power) within 10 years or less at rates of 7% and worse on increasing rates beyond this.
Moreover, with the nature of current inflation being “COST-PLUS” orientated, ‘C’ suite pressure on procurement is growing to mitigate the effects of high inflation for their organisation?
Buyers are working hard to add to their toolbox of options to help manage down rising costs – but suppliers also will have to play their part. Especially when so many working in the average procurement team today have never previously worked during genuinely inflationary times.
But supplier are the experts. They know where true cost resides. And if buyers and sellers work together as a team – against the common enemy of waste – much can be achieved to manage down the effects of inflation particularly.
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. Australia is not unaffected, for sure.
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 is more important than best-margin, in a world of growing shortages? In this sense, many buyers are being asked to rebalance RISK (of non-supply) against COST (savings) individually for every critical overseas sourcing decision and supply line?
Lean supply chains have been attractive for the last two or three decades, but the total cost can be crippling when they fail. Is the answer more robust supply lines – perhaps higher stock levels, or near-sourcing, on-shoring or just dual-sourcing in future?
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.
- Supply chain security
An increasing focus on supply chain security was driven largely by Covid-safe planning and security-of-supply questions to ensure stock availability.
Yet, as the recent Optus data leak of several million in Australia illustrates, perhaps a more pertinent and insidious risk is that of supply chain data and cyber security – far more than mere product security, and possibly even more than security-of-supply?
Is a client organisation’s cyber security only as secure as their weakest supplier perhaps? How much is the inbound supply chain taking responsibility for security – whether Covid-safe & secure, assured supply security or just simple data security? Procurement are being asked to consider these questions right now. How will key suppliers be able to help?
Other procurement pressures
Of course, in addition to these FOUR 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 – more so 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
As we all know, change is the only constant. The dynamics we all face in a VUCA world ensure this. And the supply-side of business is no different. These four priorities for procurement managers are new – there were different priorities both during the pandemic and before it. And there will be different priorities again in future in all likelihood. But for now, at least, these Top 4 give suppliers a real clue how to help their customers and themselves next year.
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.