Delivering Value Beyond Savings — Procurement’s Role in Times of Disruption
Deeply hit by the COVID-19 pandemic, companies are now exploring innovative ways to drive additional profits and increase revenue. Hard-hit sectors like manufacturing, entertainment, transportation and hospitality, to name a few, remain gripped by uncertainty. It may take a while, years in some cases, for companies in these industries to recover to pre-COVID levels. But procurement’s role can be key.
Companies are now in a quest to redefine their business models. Finding cost-cutting technologies or tools to help drive sales, mitigate risks and maximize cashflow is now a greater priority for many. And for some organizations in this revised business scenario, it’s their lifeline.
Procurement plays a significant role here, not only for the result it can bring to the bottom line but also for the increasingly strategic role procurement teams are playing. Now is the time for procurement managers to redefine themselves — from buyers to strategic partners across the entire supply chain.
Let’s look at some of the ways procurement can help the organization achieve its goals.
Procurement’s role in … Inventory Management
Procurement can focus on minimizing the inventory burden on the company by adopting techniques like supplier-maintained inventory or strategic hedging for securing supplies at a fair price (especially when there is clarity on demand variations). It can also help revisit minimum safety stock levels through a vigilant analysis that encompasses factors like demand planning, pipeline projects, current orders, lead time, material movement rate, price and other factors.
Given the current financial situation, procurement can also support the liquidation of slow-moving and non-moving stock by locating appropriate suppliers. Deep-dives into supply chain inventory levels and risk management data can play a substantial role in determining the inventory to be maintained at the plant or site. MOQ/MPQ negotiations also can prove valuable by avoiding item overstocking.
Working Capital Management
Payment term and incoterm extensions are imperative in maintaining cashflow. This, however, must be a balanced win-win approach. Providing additional business to suppliers with supplier and item consolidations and establishing enterprise-level agreements can enable win-win situations.
A move toward digital may be inevitable, especially to fix short-term issues and ensure efficient continuity of business. There are multiple tools in the market that can not only support risk mitigation but also maximize benefits. Real-time supplier interaction, collaboration and support are vital — and can be easily achieved with digital tools. E-invoicing and e-payment can ensure quick and efficient operations with reduction in processing time.
For example, SAP Ariba buying channels maximize savings and enhance compliance. Contract compliance in Ariba can also play a major role in avoiding overbilling or even drive additional savings for the company. This is crucial for high-spend contracts with accruals or managing global contracts with commodities like metals and fuel, which are subjected to frequent price fluctuations.
AI as a means for analyzing supply chain disruptions and providing solutions is a maturing aspect in the industry that should also be explored. Cognitive procurement is an upcoming technology that can change the way S2P functions, enabling S2P to be more proactive, with options for scenario analysis and predictive analytics for taking appropriate decisions to mitigate risks.
A short-term procurement plan with a primary focus on savings proved to be fatal for some companies during the pandemic. Strategic sourcing’s role is to build long-term strategic partnerships with a focus on delivering ongoing value, not just driving short-term savings.
Supplier Market Intelligence is critical for assessing risk, particularly in times of disruption. This can be an important tool for mitigating risks associated with supplier stability prior to engaging with them.
Short-term fixes — S2C teams can explore options for alternate goods/services with lower costs. Local and niche suppliers should be carefully considered for ease of operation and potential to act as part of a contingency plan for any issues that arise with top suppliers. Also explore signing bonuses and advance/early payments leading to item consolidation to attain volume discounts.
Mid-term fixes — Reshape supplier relationships by amending or renegotiating agreements with suppliers accounting for 50% of spend or more. Revisit opportunity assessments with value as a primary factor and an eye toward resilience. Multiyear deals with year-over-year price capping should be considered as a means for gaining additional discounts over the life of the contract.
Any supplier that serves as the sole source for high-value, fast-moving, longer lead time or customized items must be evaluated, and finding alternate global and local suppliers should be top priority.
Tightening the category management process, especially among hard-hit categories, can squeeze in additional savings. For example, bring maverick spend under control by recategorizing goods and services in the correct category buckets to enable volume-based discounts.
Turnkey Project and Early Contractor Engagement (ECE)
Early Contractor Engagement is one option companies may choose, especially in times of disruption. When used for infrastructure-related projects, ECE can enable cost control by ensuring budget clarity and reducing variations. However, a strategic approach is required to decide if the project should be converted into Turnkey, especially in cases where the total project value needs a complete analysis.
Overall Supply Chain Risks Assessment
Make risk assessment a priority. Analyze plan time, inventory and risk of potential delay in delivery of commodities. Include sub-suppliers in your risk assessment. The issues arising out of a bullwhip effect in the supply chain can be dampened to some extent by taking a proactive, assessment-first approach.
When procurement managers embrace innovative and sustainable ideas and technologies and align their operations to customer requirements and sentiments, procurement can cushion the impact of a financial burden in a variety of ways. Prior to 2020, procurement as a function was already evolving from a cost center to a profit center. The pandemic has only served to push this evolution forward and set the stage for 2021 to be the year of procurement transformation.