Procurement Technology, Digitization Can Blunt Economic Headwinds, GEP Report Says

Although global GDP grew a healthy 3.1% in 2018, the year finished with a rocky fourth quarter. Against this backdrop, GEP has released its 2019 Procurement and Supply Chain Management Outlook, which predicts a tough business climate ahead, but one that can be addressed with advances in procurement technology.

The Clark, N.J.-based consulting firm foresees growth in 2019 declining slightly to 3.0% but cautions that the trading environment is growing more volatile amid increasing signs of potential deceleration. According to the report, “the drivers include lower growth expected in the coming years across Europe and China — and now possibly the U.S. — that may well overshadow expected gains within emerging markets.”

GEP has identified three major trends that will affect procurement and supply chain this year:

  • Rising trade tension
  • Dynamic labor conditions
  • Costs of climate change

“To adapt to this ‘new normal’ of heightened market instability, procurement and supply chain leaders will further embrace the twin aims of a) building a highly agile and responsive operating model, and b) fully digitizing source-to-pay processes to deliver more effective and efficient services to their stakeholders,” the report states.

Trade tensions between the U.S. and China are expected to increase, resulting in wide-ranging implications for businesses. Indeed, the steady rise in the trading costs of key goods will force a global realignment in trade flows as both superpowers seek out newer trading partners.

Likewise, GEP expects Brexit-related uncertainty to continue fueling rising levels of isolationism and civil unrest across Europe. Not only will this further slow down growth in Europe, but it also will destabilize the emerging markets that are otherwise poised for fast growth.

Debt and Labor Costs

On top of all this, the increasing global debt level will be a major risk factor to track, according to the report.

With unemployment rates in the U.S. and China at their lowest, labor costs in the business and tech sectors are expected to increase. Organizations with variable labor requirements will be most susceptible to the increased cost of securing qualified employees and should take steps to prevent any impact on business operations.

The report also notes that as emerging economies continue to mature in the year ahead, they will produce more high-skilled workers, which will drive up labor costs. China exemplifies this trend, with median wages in certain cities now surpassing those in parts of Eastern Europe. Global trade conflicts, in combination with the continued labor rate increases, will force the U.S. and other developed economies to look far beyond China for the next source of low-cost manufacturing. The destinations for 2019 will include established manufacturing hubs in places like Bangladesh and Vietnam, along with emerging possibilities like Ethiopia.

Climate Change is a Factor

In terms of climate change, the report notes that 17 of the planet’s 18 warmest years on record (since measurement started in 1880) have occurred since 2000. Infrastructure and crop damage costs — and the insurance premiums to cover them — have similarly worsening patterns. Despite promising commitments made at the Paris summit, global temperatures and emissions rose again in 2018. The forecast is not promising in either the short or long term. Indeed, according to the recent National Climate Assessment Report produced by the U.S., economic costs by 2100 in the U.S. alone are projected to reach $500 billion per year due to crop damage, lost labor and extreme weather events.

‘Digital First’ Strategies

On the digital procurement front, GEP points out that leading companies are pursuing “digital first” strategies. That involves leveraging existing and rapidly emerging modern technologies such as artificial intelligence (AI), cloud-based solutions, the internet of things (IoT), advanced predictive analytics, cognitive computing and natural language processing (NLP) to transform business models, modernize functional strategies and digitize end-to-end processes to drive innovation. Technology will no longer be a tool for helping processes — it will be the definer of new capabilities within the organization, such as advanced, best-practice processes in which manual ones are automated and some are eliminated.

“The softening economy will increase pressure on procurement and supply chain leaders to deliver higher returns and more satisfied customers through digitized and AI-enabled processes and operating models,” the report states. “Market and supply chain volatility will remain high, and supply chain professionals will upskill their digital capabilities to better manage supplier and cybersecurity risks and to provide agile responses to unforeseen market shocks.”

In the digital-first world, procurement will take an active role. As a strategic partner that interacts not only with the supply base but also with internal functions and business units, procurement will continue to play a part in defining a digital transformation strategy and enable other departments to fulfill their digital duty.

Blockchain, RPA and UX

Blockchain advances and robotic process automation (RPA) offer a lot of promise, the report states.

“Blockchain technology that holds the potential of streamlining and disintermediating complex supply chains will move beyond initial pilot phases to more complete solutions,” the report states. “Industry-specific variations will grow and begin to demonstrate the full power of distributed ledger technologies. Broad levels of adoption will be hampered, however, until national and cross-border trade rules catch up with this disruptive technology.”

RPA-driven efforts will have wide effects on efficiency, the report states.

“These will be led by cross-functional teams with strong governance models to coordinate all process and system interdependencies and to maintain a growing array of bots in service,” it says.

The report suggests that rather than just digitizing or eliminating process steps, procurement’s holistic S2P solutions will empower end-to-end visibility, deeper insights and greater collaboration internally and externally.

User experience will provide motivation for companies to improve their digital footing.

“Procurement leaders will also focus on improving end-user experience to increase client satisfaction and self-service capabilities,” the report states. “Intuitive, digitized workflows such as ‘guided buying’ will quickly connect each unique stakeholder with the right product, supplier, pricing, terms and buying channel. End-user empowerment will take significant time and pain out of the ordering process and drive higher savings through improved contract compliance.”

In summary, the GEP report notes that in the wake of one of the longest, albeit gradual and unevenly distributed, periods of economic expansion and wealth creation on record, supply chain leaders should prepare themselves for a more unpredictable business climate in the coming years. Noting that individual markets and regions can trend differently, GEP recommends a series of steps to prepare the supply chain for these business conditions:

  • Account for the potential impact of a reduction in China’s growth on major categories such as shipping and commodities
  • Factor in the potential cost and impact of increased tariffs, especially on small- to mid-size suppliers, and in the U.S. and China markets
  • Track supplier risk diligently, including solvency risks as interest rates rise and demand in key markets slackens
  • Look to emerging markets for sources of growth and for supplier capabilities
  • Anticipate cost increases in business and tech services where wage increases are most likely and skills in the highest demand
  • Continue to drive automation and efficiencies throughout supply chains, especially with the internet of things (IoT) and AI-driven predictive analytics

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