The challenges in sourcing and procurement have been mounting with the move to on-shoring, the impact of Brexit, and the potential to use artificial intelligence. Sam Tulip analyses the key factors…
The staid and conventional world of commercial and industrial purchasing is waking up to some new and significant challenges. From major rethinks of global sourcing strategies, to the ethical and business rules around what to buy and who to trade with, and the IT powering procurement, there are new tricks to be learnt, and perhaps some old ones to be rediscovered.
Andrew Black, a Principal at procurement consultancy Efficio, sets the scene: “A new trend is a reversion among sourcing and procurement professionals to their original function: securing supply and managing risks.
“After a long period in which a huge amount of focus was invested in reducing costs and achieving lower prices, a variety of emerging issues, but, in particular, Brexit, are now leading to a new interest in shortening and de-risking supply chains”.
But the implications of Brexit are just a special case of a more general, world-wide, trend towards onshoring, nearshoring or reshoring – realigning corporate strategies to bring supply sources much closer to user markets.
Historians will doubtless link this to Trump or Brexit, but the reality is that this trend has been gathering pace for a decade and for economic rather than political reasons.
The labour cost advantages of suppliers in countries such as China have been heavily eroded, to the point where many Chinese manufacturers themselves now outsource to ‘low cost countries’ such as Vietnam or Cambodia. Additionally, buyers have developed a better feel for total landed cost, and for risk.
But in addition, the ever increasing velocity and complexity of trade – ever shorter product life cycles, fragmented and less predictable demand patterns, more demanding consumers and mass customisation – make it more attractive to locate supply closer to consumption.
However, this is not the death-knell for globalisation. As formerly ‘cheap labour’ countries such as India or China have developed, their importance as sources is often being superseded by their importance as markets. So the challenge for many brands is to source and procure from one region for delivery direct to consumer channels in another, without the goods ever touching the brand’s home country in the US or Europe.
In June Miebach Consulting published a cross-sectoral survey of American and European companies which showed just over half of respondents are actively relocating production in closer proximity to markets. However, while in the Americas 43 per cent of companies are onshoring (bringing production back to their home market), in Europe 69 per cent are looking at nearshoring (the Maghreb countries, or Turkey, for example) to get closer to markets while not incurring the full cost of EU production.
Asian companies, meanwhile are still (67 per cent) focusing on offshoring to relatively cheaper neighbours.
These decisions are predominantly about market responsiveness: nonetheless political ‘events’ such as Brexit are real, and supply chains are responding. Andrew Black says: “We have worked with a range of clients over the past 18 months who, in response to Brexit, have become keenly aware of the risks of continuing to source critical components from European suppliers. In particular, with uncertainty around the future tariff regime that the UK will face and the potential for disruption as goods transit between the EU and the UK there is now an interest in trying to localise more of the supply-base, even if, in some cases, this means an increase in costs.
“A major challenge will be to find ways of off-setting these cost increases against reductions elsewhere in the supply chain and so we don’t expect manufacturers and exporters to lose sight of cost containment entirely but we do expect them to become much more conscious of the need to balance the focus on costs against risks to continuity, and predictability, of supply.
“This also introduces a new set of variables for sourcing & procurement professionals to have to contend with as issues such as the percentage of locally produced parts in finished goods (likely to be a key discussion point in any future trade negotiations with the EU) shape the potential sourcing options available”.
A survey of over 2,000 firms around the world just published by the Chartered Institute of Procurement & Supply tends to confirm this view. 32 per cent of UK businesses currently using EU suppliers are looking for British replacements, while 46 per cent of European companies expect to reduce their use of UK suppliers. The good news that nearly half of the sample are actively engaged in risk analysis: less encouraging is that 36 per cent of UK businesses plan to respond to Brexit by beating down supplier prices – one would have hoped for a rather more sophisticated response!
There is, of course, a further imponderable. If the UK government is successful in negotiating beneficial trade deals post-Brexit, it is at least conceivable that this could result in a further round of offshoring. Who knows, but these are certainly interesting times for sourcing strategists.
There is another big set of risks, which the savvy procurement director will be alert to. In the US, in parts at least of the EU, and elsewhere, there is growing pressure for ‘America First’, European preference and so on, especially in the award conditions of public sector contracts. As usual, politicians are behind the curve – manufacturing is already ‘coming home’ where it makes any economic sense.
There is though a real danger that these populist and protectionist moves could enforce ‘reshoring’ at the expense of what has been called ‘bestshoring’.
But mostly, far-reaching procurement decisions are not made at government behest; they are not necessarily even part of boardroom strategy. Richard Wilding, professor of supply chain strategy at Cranfield School of Management, warned recently that procurement managers need to think about the wider social and environmental impacts of business decisions.
He gave an example of a sports goods manufacturer that replaced around 130,000 Asian factory workers by nearshoring to a highly automated European factory with just 1,000 employees. As Wilding pointed out “These are procurement decisions rather than board level ones. I could be making a procurement decision but what is the impact it could be having on society?”
That is an ethical issue, and ethics are a big part of the current procurement landscape.
CIPS believes that “procurement teams are in the best place to understand the many social changes and technological advances in the coming decades and they can take the lead. They can develop policy, and change behaviour in business such as becoming more ethically aware or building resilience in supply chains”.
Procurement is no stranger to ethical and social responsibility challenges. Since the 1970s and the growth of environmental and later societal concerns, procurement has been more and more in the frontline, protecting the company against reputational risks and economic liabilities, although not necessarily being granted the appropriate tools or authority.
Or in some cases, perhaps too much. A perennial sore in British retailing is the perceived maltreatment by major retail chains, and specifically in the grocery sector, of their suppliers. A report in June from Christine Tacon, the Groceries Code Adjudicator suggests that things are getting better but nonetheless over half of suppliers still report at least one major issue a year under the Grocery Supply Code of Practice.
There is an elephant in the room here, and with many of the other issues in procurement. Even in very significant companies and organisations much or most procurement is carried out by people who are not fully trained, whose function is seen as merely operational/administrative and so they are out of the strategic loop, and who perhaps as a result get their job satisfaction from ‘beating up the supplier’. No-one ever got sacked for getting tuppence off the unit cost.
CIPS says: “The reality is that most buying activity is performed by non-professionals. Buyers without a professional background will need more support than ever before.
These buyers will need the right knowledge, the skills, and capability to procure in ways that are ethical, sustainable, resilient and effective and they will need to be part of the vast body of knowledge and cross-skilling, with other professional bodies, and experts”.
Of the many ethical issues that procurement must handle, the current headline is probably ‘Modern Slavery’. The Modern Slavery Act of 2015 in the UK has drawn attention to supply chains and those that manage them as clear evidence of the good that excellence in procurement practice can do. Though the impact of the Act has largely been felt in the UK, any businesses trading with British suppliers need to be aware of how the Act can affect them.
A CIPS survey in 2015 found that UK businesses were woefully unaware of what implications the Act had for them. One in five UK supply chain managers were unaware of the new rules, 27 per cent did not fully understand what their business was required to do to, one in four couldn’t name a single step they have taken to comply with the law, and more than half said they lack the skills to deal with modern slavery in their supply chains.
“Just a third of supply chain managers claimed to have mapped their suppliers to understand the potential risks and exposure to modern slavery, while only 41 per cent have ensured all workers in the UK in their supply chain receive the minimum wage and apply robust immigration checks. Less than 28 per cent of businesses in this group claim to have provided training to employees and local suppliers on modern slavery”.
With such a new Act, the impact is hard to judge as yet – CIPS is publishing an updated survey imminently.
Behavioural changes take time to bed in. It is sobering to recall that until quite recently, in many European countries bribing foreign companies or countries for business wasn’t illegal. We may even be going backwards – an Economist Intelligence Unit study of global businesses recently reported that “only 22 per cent of companies are addressing child labour, 23 per cent climate change, and 28 per cent gender equality” in their supply chains. Apparently they prefer to do their virtue signalling in areas that are quantifiable in the short term, such as H&S, or waste reduction/recycling. Almost all the 800 executives reckoned their companies met or exceeded government/regulator requirements, yet “30 per cent of firms have decreased their focus on supply chain responsibility over the past five years”. Counter-intuitively, it has moved up the agenda in everyone’s bad boy, China.
Procurement decisions, often taken at an operational level for valid reasons, may inadvertently expose the company to all sorts of strategic repercussions. The case for Procurement to be fully engaged at the board/strategic level has never been stronger, but this is still relatively rare.
Negotiating with the ‘bots
Sourcing and procurement are still largely driven by human skills, knowledge, experience and, sometimes, gut feeling. Certainly, IT and automation abound in the supply chain, and procurement is increasingly informed by automated real time sales data, predictive analytics in demand forecasting, scenario modelling, electronic catalogues and, closing out the source-to-pay cycle, automated invoice reconciliation and payment. But the core skills of identifying suppliers, building relationships, leveraging those relationships in contract negotiation, remain, at any level above that of mere catalogue-based purchasing, human activities.
For how much longer? Big data, artificial intelligence and machine learning will surely have a major impact, but the jury is still out on quite how this will work, or indeed whether Boards will support these developments. A recent report by the consultancy Ayming suggested that 90 per cent of CPOs thought technology was the answer to improving procurement efficiency, while only a quarter thought that departmental reorganisation might be key. By contrast, among their CEOs 76 per cent cited technology and 58 per cent reorganisation.
Ayming also revealed that almost half of CPOs think value creation and cost savings through procurement is part of the company’s core strategy, but only 28 per cent of CEOs agree. That misalignment necessarily affects the resources and backing available for investment in procurement technology.
It is perhaps no surprise then that a recent review by Gartner of the $13 billion supply chain software market (including procurement) suggests that procurement is leading the way to cloud-based and SaaS solutions – which have the advantage that they can often be totally funded out of savings with minimal upfront investment and so no need to get the Board involved.
Says Mark O’Shea, chief technology officer at blur Group, a spend management company, say: “The ease of buying, selling and finding the right suppliers across a full array of business services and goods via the cloud is a natural expectation for the younger generation of professionals moving into budget management roles.
“The sophistication and accessibility of online procurement marketplaces will also mean employees in organisations of all sizes won’t have to waste time sourcing niche suppliers. Instead, online platforms will streamline their purchasing capabilities, helping them get faster access to high quality suppliers while also ensuring in-house compliance”.
O’Shea’s comments on marketplaces are interesting – at the beginning of the internet era, many marketplaces and exchanges sprang up but most failed. The problems were several. Firstly the technology was still pretty clunky (web portals and mobile technologies were in their infancy). But also, the value proposition was weak – many functioned as little more than dating agencies, and once you’ve found a few new suppliers, why would you go on paying fees?
Some of the new breed of marketplace seem to have answered these problems by addressing much more of the source to contract/purchase to pay cycle. In logistics, for example, operations such as Transporeon or Transwide offer not only to introduce many thousands of ‘prequalified’ carriers (whatever ‘pre-qualified may actually mean) but can match need to availability, make and confirm the booking, track and trace the execution, and handle settlement, all with a high degree of process automation that can produce real savings in overhead as well as in rate card prices, and offered as self-service or as fully managed services.
There are now emerging cloud based solutions for procurement, designed for the mobile environment, anticipating AI developments and built around procurement’s requirements – Smart by the US company GEP would be an example.
But even these proponents of a brave new world recognise the limitations. Paul Blake, product marketing manager at GEP, (in a paper for ‘Supply Management Insider’), says: “If you think about the back and forth involved in most negotiations in business, it seems obvious that – for transactions of a certain size or significance – people, for the foreseeable future, will be far better equipped than machines to find novel, innovative solutions”.