Procurement 2020: Intelligent Markets for Sourcing and Long-Term Thinking (Part 1)

We are delighted to feature this post from Dr. Alan Holland, CEO and Founder, Keelvar. Dr Holland gives us an insight into the key trends that Keelvar predicts for procurement over the next 10 years and more. We start with part one today and continue with part two tomorrow.

Carlos Alvarenga of Ernst & Young recently wrote a piece for Procurement Leaders outlining his vision of what procurement will look like in 2025 in the first installment of a series of posts. In this article we lay out our predictions for how strategic thinking will change as we move towards 2020, and how sourcing will unleash much greater efficiencies in the years to come.

In what is undoubtedly going to continue as a period of ongoing transformation, the main certainty we envisage is that the discipline will continue to become more professional, leading to procurement being increasingly recognised as a key function crucial to the bottom line of any organisation of significant scale.

The following represent some of the additional key trends we see emerging in the next few years, more will follow tomorrow:

1. Abandonment of Sole Supplier Contracts

Central bankers often describe loose monetary policy (cheap money) as being the 'sweet poison' of inflation. It can lower effective debt and provide increased economic activity because more people borrow, but it comes at a cost that is eventually realised should the borrower struggle to repay debts.

The drive for efficiencies and economies of scale in buying has lured sourcing professionals into a similar trap. Sole supplier outcomes can reduce costs initially, but it hands significant leverage to that supplier who gradually gains tighter control and dependency can become high. Buying organisations can find themselves becoming vulnerable in negotiations with no credible alternatives to turn to when prices tick upwards. Short-term gains can lead to long-term higher costs especially if the supplier pool is shallow. The risk inherent in sole supplier relationships also means that supply shocks can result in dire consequences. We believe more organisations will take a more strategic perspective looking to ensure competitive tension exists amongst a small number of suppliers.

2. CPOs to Receive Long-Term Contracts

A solution to short-term thinking among central bankers has been for top Central Bank officials to receive lengthy periods in office to encourage long-term planning. For example, Alan Greenspan was in his post for 19 years. One may argue that his monetary policy became too loose when he was in his final years in office and his successor Ben Bernanke would reap what was sown.

The current policy of bringing in CPOs to transform procurement practices in four to five years and to then have them move on means incentives are strategically misaligned with longer-term corporate objectives.

This practice has the effect of incentivising short-term price-gouging activities that harm supplier relationships, encourage supply consolidation and ultimately feed into higher prices (but this cycle can take time).

We believe that enterprises and governments will increasingly begin to appreciate that strong supplier relationships are essential, and that senior executives will need to be incentivised to plan over longer-term horizons of 10-plus years. This will result in an increased focus on win-win partnerships in place of a zero-sum approach where CPOs looked to squeeze suppliers causing quality to suffer.

Tomorrow in part two, Dr Holland will be discussing two further trends: Data-Driven Decision Making and Sourcing Optimisation to Become Standard.

Discuss this:

Your email address will not be published. Required fields are marked *