Spend Matters Procurement Predictions: Five Scenarios For the Next Decade (Part 5 – B)

See previous posts in this series here:
Part 1
Part 2
Part 3
Part 4-A
Part 4-B

To bring scenario four alive, let's consider two examples of how Global Supply Chain Intelligence [will] Dictate Winners and Losers in the next procurement decade. Beginning with supply chain risk, it does not take much imagination to consider the impact on suppliers and supply availability of a hypothetical natural disaster in Asia later in 2013 combined with demand uncertainty in the EU. Under this example, with reduced commitments to suppliers from smaller order volumes in Europe -- which may cascade and create working capital challenges for smaller, sub-tier suppliers -- combined with the temporary shut-down of facilities from potential weather/earthquake related damage and power outages, the potential for supply disruptions much larger than the type we've faced from hard-drive shortages owing to the flooding in Thailand in 2011 becomes abundantly clear.

Playing out the logical ends of this example, those organizations with early insight into the situation on the ground are those most likely to be able to respond by putting contingency plans into place, which may include on-site supplier development efforts, loans/early payment to suppliers, shifting sub-tier spend to other markets and related efforts. In short, rapid visibility and action will be rewarded, as the bulk of the market responds after those with early visibility have moved quickly. Decisions that are delayed even hours in such a case (e.g., buying up capacity elsewhere) could provide the difference between a massive P&L hit -- or not.

Moving on from the ability to respond quickly to supply disruptions, let's next consider a commodity forecasting scenario example that emphasizes a similar ability to sort through distributed data and intelligence and respond accordingly, ahead of the market. To wit, let's take the case of an industrial manufacturer (or CPG company) that is looking at significant variation of demand forecasts between the US, Europe and the developing/growth markets in Asia in 2014. This organization, which has successfully gained visibility into its direct materials spend at the sub-tier level down to specific part and weight requirements (e.g., X number of pounds/tons of a specific titanium alloy or Polyethylene), decides that for its spending in developing markets which are so critical to its growth, it will take out a hedge by buying forward with key distributors and/or manufacturers.

Yet in other markets, given demand uncertainty and the potential for falling commodity prices, the company decides to buy on the spot market for the coming quarters. This partially hedged approach, developed by focusing on underlying commodity intelligence gathering and analysis efforts, minimizes down-side risk in emerging markets while enabling potential upside on margin should commodity markets drop.

Successfully bringing these two examples alive -- not to mention the broader scenario -- will require a new focus on both technology as well as talent. It's our belief that we'll see leading organizations double down on these efforts to come out on top of this scenario in the coming years, including dramatic investment acceleration in such areas as:

  • Supply chain risk/supplier risk management tools, services and content
  • Closer linkages between information services/content providers and enterprise application investments (e.g., D&B, Thomson Reuters, LexisNexis, etc.)
  • Analytical tools that step outside the world of traditional BI by providing integrated context and visibility (e.g., inventory alerts, news alerts, lower-tier supply chain risk alerts) within a core application rather than having to launch into a reporting module
  • A new type of integrated commodity management skills/teams (coming from procurement, finance, operations, etc.) that have the similar awareness and skill sets of trading organizations but with the organizational knowledge and empathy of those on the shop floor (e.g., materials planners)
  • Collaboration tools and capabilities that enable planning efforts both internally and with key suppliers

Stay tuned as we wrap up this post series with our final procurement scenario for the next decade.

- Jason Busch

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