Spend Matters welcomes another guest post from Teja Kappagantula of GEP.
Procurement is often in a difficult position when the company’s business is exposed to significant supply risks. A strong focus on savings could mean poor service levels for internal customers and stringent service levels to the internal customers could result in significantly inflated costs. Is there a magic wand that can help procurement teams achieve these seemingly conflicting goals?
Typical supply risks faced by the organizations include but are not limited to poor quality of raw materials, volatile prices, exchange rate volatility, supply disruption, and financial risk. Procurement can definitely influence some of these to an extent to add significant value to the organization:
Poor Quality: Poor quality of raw materials delivered could either be a result of lack of adherence by the supplier or inadequate understanding of the conformance quality and specification requirements. Failure on the suppliers’ end is something that procurement is able to address quite effectively through alternative source development and proactive supplier performance management. However, adequate understanding of the conformance quality and specifications by the suppliers can be ensured by procurement teams’ work in educating the business users in the differences between the features and benefits; using functional requirements to define the technical baseline; involving the suppliers in the process of defining these; and demonstrating the dangers of over-engineering of the specifications through thorough sensitivity analysis with the help of the suppliers.
Raw Material Price Volatility: Finance has better tools in managing the price volatility through complex forecasting techniques and hedging. Procurement can play a part in mitigating the price volatility by ensuring the quality of data available for the price forecasting; conducting thorough value chain analysis to identify the extent of influence that the company can exert; conducting periodic commodity strategy reviews to evaluate the feasibility and the benefits of backward integration. Backward integration and cross-linkages with the suppliers is used as a price volatility risk mitigation strategy by the large agrochemical companies.
Supply Disruption: Conducting the value chain risk analysis of the company’s line of business will help identify the bottlenecks in the supply chain with high supply chain disruption risk. Periodic reviews to minimize the dependence on far-flung supply chains will help reveal the opportunities to mitigate this risk. The recent factory fire incidents in Bangladesh were a reminder of the supply disruption risks that come with these supply chains. Apple’s plan to “reshore” part of its production back to the USA is one way to decrease risk.
Supplier Financial Risk: Conducting the financial risk assessment for the suppliers of key raw materials is still a passive approach to mitigating the mentioned risk, especially so in case of strategic commodities. Proactive means for addressing this would be to help the upstream businesses better manage their working capital and inventory requirements.
For more interesting thinking on procurement, visit the GEP Knowledge Portal.