The past year has presented us all with enormous challenges – whether private or professional. Those who were able to master them can count themselves lucky. We have witnessed historic moments when the future changes direction. So-called deep crises. The world as we knew it until February 2020 is dissolving. Behind it, a new world is coming together. The task for today’s leaders is to anticipate its formation.

The focus must therefore be on the challenges and tasks immediately ahead. But what will these be in the areas of procurement and supply chain?

In the past, Chief Procurement Officers have been measured primarily by their ability to enable savings in the value chain. Without question, cost reduction will remain critical in the future. But with the advent of digital networks, buyers are able to generate much greater value. With networks and innovation in the context of rapidly evolving „artificial intelligence“ (AI) and the „Internet of Things,“ CPOs can gain insights from a variety of seemingly unrelated data and focus on strategic priorities such as strengthening supply chain resilience, protecting the brand from third-party risk, and tapping into new sources of innovation.

As a result, we believe the following topics will keep procurement and supply chain leaders busy in the coming quarters.

Has global sourcing had its day after Corona?

A new study on the impact of Corona on supply chain management reveals a clear trend „back to Europe „1. According to the study, around two-thirds of the 250 German business leaders and supply chain experts surveyed believe that the importance of European and national procurement markets will grow.

In terms of the concept of „global sourcing“, this is not a contradiction in our view. After all, global also includes the sources that lie around the proverbial church spire. However, it would be a mistake to blindly swap the dogma of far-flung supply chains for that of a mainly local pool of suppliers. Neither the one nor the other does justice to a risk assessment from a rational point of view.

The goal must be to create transparency within supply chains – systematized transparency is the mandatory prerequisite for sustainable entrepreneurial risk minimization.

Yes, it is likely that many buyers, when applying balanced risk management with regard to their supply chains, will find that one is too one-sided geographically and knows too little about the supply chains of the essential suppliers and their upstream suppliers. But this is exactly where the enormous opportunity lies in the current situation. Not blind actionism that switches from global to local (relocalization). But rather the use of existing sources and a return to true „global sourcing“ – the transparent, balanced use of all available suppliers – regardless of whether they are 8,000 nautical miles away or 35 kilometers in the neighboring county. In terms of a necessary total cost view, inventory management and liquidity, positive effects can be expected here.

Sustainability stings pandemic?

On the way to the „new normal,“ sustainability makes it back into the trending topics. The topics of sustainability, decarbonization and social compliance are becoming increasingly important. They are demanded by the market, by consumers and by politicians. There are several reasons for this: on the one hand there are the big discussions in Germany about the new legislation on supply chains („Supply Chain Act“), on the other hand there are leading companies, like Volkswagen or also other companies in the fashion, automotive and food industry, which have communicated clear statements and more or less ambitious goals regarding their climate neutrality targets, concrete measures, innovative & sustainable products.

Furthermore, due to increasingly stringent legal requirements at national and EU level, the topic of sustainability has long since ceased to be a matter for public relations departments and civil activists but is becoming an integral part of corporate activity.

One example of this is the measures to combat global warming and the associated pricing of greenhouse gas emissions. So how do you deal with this risk in the short, medium and long term? What are your climate goals and the climate goals of your customers?

Of course, it is difficult to answer this question in a blanket or even conclusive manner, as there are a multitude of unknown parameters at play. Which measures must be taken in your company depends on the value chain of your products, among other things the countries of origin of your raw materials and purchased parts, as well as a cost- and CO2-optimized energy mix for your own production services? For example, it is easier to achieve climate neutrality with supply chains from a country that uses renewable energy.  The decisive factor for you is the targeted development of a sustainability strategy for your company in this regard.

Whether regional or global – control and transparency over procurement chains/networks is essential

As the preceding paragraphs impressively show, control and transparency over procurement chains/networks will be of critical importance for success. And this is not only due to the upcoming legal regulations.

We have already reported in the past on the German government’s planned Supply Chain Act (our article on this here). A set of rules with requirements for binding due diligence in relation to human rights and environmental protection is planned, which will oblige companies to analyze, prevent and document compliance with these within their global value and supply chains.

In our view, this issue, if addressed proactively, rather presents a great opportunity for companies that already act responsibly and are methodically well positioned in purchasing and the supply chain. A legal obligation would mean a further competitive advantage over companies acting unfairly. All market participants would then be legally obligated to adhere to human rights and environmental standards not only domestically, but also in an international context, and especially in their purchasing behavior, and to maintain appropriate documentation.

Companies that already have a proven commitment to human rights and the environment in their purchasing behavior can also derive further economic benefits from this. For example, it may be easier for them to attract investors, to be included in so-called „fair funds“ or to recruit qualified employees more easily, who consciously choose an employer with whose set of values they can identify themselves. Such a commitment also ensures, above all, greater trust on the consumer side.

By leveraging some of the technology already available to them today, procurement can quickly draw meaningful insights from the data available in supply chains to make smarter decisions that not only move companies forward, but also create a measurable difference in the world around them.

Procurement can combine insights from sourcing data and previously unstructured information to predict and respond to customer and market demands. Or it can map the bill of materials of the products and services being manufactured and purchased, down to their raw materials, and compare this information with known hotspots, in terms of compliance relevant framework conditions.

This enables companies to determine risk and define appropriate actions to mitigate them. This enables a supply chain that is more responsible, sustainable and inclusive. A clear competitive advantage that can be represented on the cost side as well as from a customer perspective.

To what extent is Blockchain establishing itself in practice as a solution tool?

Blockchain in procurement is intended to do just that – increase the transparency of supply chains, provide security and structure large volumes of data. But will it work reliably and, above all, efficiently in practice in the future? Even if you already understand the captivating concept behind blockchain, this question is not quite so easy to answer.

Let’s look at an absolutely topical example with the supply chains of the early Corona vaccines: some vaccines have to be cooled at minus 70 degrees Celsius and more. Keeping this entire supply chain continuously temperature-controlled and cooled is a Herculean task – and not just in warm regions such as Africa.

But maintaining a certain temperature level is required for many products – and that’s not just true for vaccines. Companies must be able to always guarantee complete supply chain monitoring and product traceability. In addition, origin information across locations and supply chain partners is relevant.

Blockchain technology and corresponding platforms make it possible to generate, verify and track the information relevant for this decision reliably and in a tamper-proof manner, and to make it available to consumers on a broad basis at the end (Our article on this here).

However, the development of a blockchain (in procurement) is currently still relatively cost-intensive and associated with high energy requirements due to the extremely high server power required. So, as with so much, the use of blockchain must be weighed up: How great is the benefit for all parties involved, and how high are the costs of implementation? For which application areas does the use of this development represent a holistic business advantage?

Harmonization of digital working environments

Many of our midmarket customers rely on multiple ERP systems, and some in the corporate environment rely on a double-digit number. Even before the pandemic, the inefficiencies of these homegrown, parallel silos were becoming apparent. Covid-19 has exacerbated the inefficiencies. For example, the juxtaposition of systems artificially stockpiles inventory buffers on a regular basis, causes costly information delays, and incurs high IT costs for interfaces, maintenance, and upgrades.

The clear task for the future should be to gradually tear down these silos. Setting up the necessary digitization strategy and the corresponding tools will be a key task for the management levels.

A central task is to sift through and clear out the historically grown uncontrolled growth of processes and manual auxiliary tools. Over the years, individual processes have been established for many recurring business transactions, some of which are even person dependent. And most of the time, they are so individual that the associated adaptation of the ERP is not in a justifiable cost-benefit ratio.

The most important optimization step is therefore: reduce diversity.

For some types of needs, there are specialized, very good software solutions. The simplest method for mapping individual processes is certainly workflow builders, also known as low code platforms. With these, processes can be mapped as an interactive workflow without applying great programming skills (our article on this here).

Without low code platforms, the effort would have been enormous in the past. With a little experience, many smaller problems can be solved efficiently within a short time today.

Automation – What can AI do for SCM?

Companies responding to the situation in 2020 will automate processes more and try to take advantage of Artificial Intelligence to achieve efficiency gains. The goal is to increase companies‘ resilience and competitiveness, especially when the physical presence of responsible employees is limited.

To keep an eye on the many influences on a company’s security of supply, purchasing departments need effective risk management, for example. This enables purchasing to react to risks at an early stage, avert damage to the company and ensure supply security through risk management. This requires a general understanding of risk, clearly defined reporting processes and comprehensive transparency regarding suppliers, processes, material groups and products. Identified risks must always lead to adequate measures and accompanying monitoring.

Supply security in constant alignment with lean and efficient risk management nevertheless requires de facto constant monitoring of a multitude of data to identify current and potential risks at an early stage. Manual monitoring of all these risk sources, however, blocks resources in purchasing that could be used for strategic and value-added activities.

For this reason, modern supply chain risk tools use artificial intelligence that collects real-time information about logistics chains based on stored parameters and condenses it into assessable information according to risk criteria. Without active intervention, buyers are automatically notified of relevant risks, shown options for action, so that they can act proactively and efficiently…

Risk management becomes an absolute success factor

However, this form of automated risk notification described above can never stand alone. Rather, it must be embedded in a structured, cross-company and management-driven holistic risk management system.

Companies that have established a transparent supply chain structure and manage it with a few meaningful KPIs, as also described above, therefore currently have an advantage.

Even the most efficient risk management cannot prevent serious shifts in sourcing advantages that were thought to be secure. But it does not catch companies with active risk management in purchasing and supply chain unprepared and generally gives those responsible the necessary time to proactively define and implement countermeasures. This will always result in a competitive advantage.

Be prepared! – Times change on their own.

The past year has shown us that you cannot be prepared for everything. However, it is certain that the above-mentioned challenges will continue to influence the success of purchasing departments in the new normal sooner or later.

Whatever topics you would like to discuss – in a non-binding sparring session or with a concrete approach – we will be happy to exchange ideas. Get in touch with us!

We wish you a good and successful year 2021. Stay healthy!

 

Author

Tim Rohweder