Supply Chain Lessons Learned: The Procurement Groove
16 sound procurement lessons you can tune into moving forward.
Lesson 1 – Every Breath you Take
Monitor disruptions for their impact on market share. Supply chain disruptions historically have been considered nuisances, says Tom Derry, CEO with the Institute for Supply Management. It has now become clear they’re more dangerous, cutting into sales, and in some cases, market share.
For instance, revenue at a consumer products food company jumped about 10% over the past year. While half the increase stemmed from the growing number of consumers eating at home, the rest was due to competitors’ inability to get their products to the stores.
“The company won market share because their competitors were having supply chain issues,” Derry says.
Lesson 2 – You’re the one that I want
Source relationships, not just materials. “Supplier relationships have to move beyond transactional relationships,” says Shruti Gupta, senior manager and industrials senior analyst with RSMUS.
She recalls a mid-sized manufacturer that continued purchasing parts during the COVID shutdowns in spring 2020. It was a risk to build inventory when demand had plummeted. But when demand later spiked, suppliers gave this customer priority.
Lesson 3 – Papa’s got a brand new bag
Consider new ideas to mitigate supply chain disruptions. Dealing with supply chain disruptions often means being open to new ways of operating, says Nicole Glenn, founder and CEO of Candor Expedite.
For example, Candor is working with a fast-food retailer to test wraps that can be used on products that require temperature control, but only for a short distance. It’s one way to work around the lack of capacity in the refrigerated market.
“Logistics is often the tail of the dog whipped around by market conditions and cost-cutting initiatives,” says Spencer Shute, senior consultant with Proxima. While risk can’t be completely avoided, integrating logistics into an overall supply chain risk model enables companies to react and mitigate challenges faster and with less disruption.
Lesson 4 – Hit me with your best shot
Communicate, even when the news isn’t good. The pandemic highlighted the importance of internal and external communicatih3n that’s real time and factual—even when the news isn’t great, like a delayed product or rate increase.
“Bad news doesn’t get better with time,” says Tonya Jackson, senior vice president and chief product delivery officer with Lexmark International.
Similarly, few people like to qualify the information they’re presenting. Yet, letting others know that the information you have could change—even that it’s likely to change—allows them to begin planning for that uncertainty.
Lesson 5 – Let’s stay together
Partner with other functions to cut risks. Priorities between internal functional groups like procurement and finance often are misaligned, says Jomarie Skurtovich, vice president, operations, Avnet United and Avnet Velocity.
Finance teams often view strategies to strengthen resilience, like building inventory buffers or multi-sourcing critical parts, as too costly. Conversely, supply chain leaders see the risk in many efficiency measures, like sole-sourcing parts.
When the two work together, “enterprises are better positioned to plan and implement strategies that lower exposure to disruptive risks without introducing cost inefficiencies,” Skurtovich says. For example, proactively tapping into the expertise of finance when considering consignment or vendor-managed inventory programs can help optimize working capital.
Lesson 6 – Life is a Highway
Plan ahead. “The farther out you plan, the more you can get a jump on the competition,” says Mark McCullough, CEO, Gebrüder Weiss USA. In transportation, that often translates to better rates and transit times.
Minh Duong, chief engineer and co-founder of Anavasi Diagnostics, worked closely with the supply chain team at their contract manufacturer to understand lead times for electronics components. He also prioritized “buying emergency stock for long-lead-time materials and materials with a high risk of future shortages.”
Developing strong working relationships and sharing production plans with suppliers allows them to plan more effectively, which can lower the risk of disruptions.
Even ordering well in advance isn’t always a guarantee against shortages. For instance, when ordering extra spare parts for a conveyor system, lead times were even longer than projected, says Annette Danek-Akey, executive vice president, supply chain with publisher Penguin Random House.
While waiting for the part to arrive, her team ran their conveyor system a little slower for a few days and did some manual sortation.They also adjusted buffer inventory levels for that key spare part.
“Buffer management is a critical skill to learn,” Danek-Akey says, noting this may mean a buffer of time for a system or technology implementation, or recognizing the new, longer lead times required to buffer inventory appropriately for spare parts and standard supplies.
Lesson 7 – We can work it out
Consider accommodation agreements. If a supplier is facing issues that could cause disruptions, an accommodation agreement can help all parties. As the name suggests, these agreements include various accommodations intended to help the supplier. They’re also generally better for the customer than rapidly hunting for a new supplier, says David Dragich with The Dragich Law Firm PLLC.
One potential stumbling block, however, is their complexity; the agreements often involve the supplier, the customer, and a lender. Similarly, it’s not necessary to wait until a supplier is in distress to draw up an agreement, although that’s often what occurs.
Lesson 8 – Go your own way
Leave when a relationship doesn’t work. “Make sure the vendors you work with are really the ones you want to be in the trenches with,” says Amanda Schuier, formerly chief operating officer with Quality Transport Company. “If a vendor isn’t offering support, don’t be afraid to explore all options available to you.”
Conversely, suppliers who go the extra mile are worth keeping.
Lesson 9 – Shop around
Partner with multiple suppliers. While partnerships are key, the days of sole-sourcing may be over, at least for some critical parts, as it leaves customers exposed to the risk of disruptions if the supplier runs into an obstacle.
“Securing a second supplier closer to the retailer’s consumer base greatly reduces shipping delays, increases production, reduces potential risk, and ultimately leads to a more satisfied consumer base,” says Rob Tillman, vice president of operations with Rakuten Super Logistics.
Lesson 10 – Who says you can’t go home
Incorporate nearshoring or reshoring. While Asia promises to remain a key supplier region, the argument for near- and/or reshoring grows more compelling.
Mexico, for instance, offers relatively inexpensive ocean shipping, as well as the ability to cost-effectively move products by rail or truck. Near- or reshoring can also help companies avoid rising geopolitical tensions.
Moreover, given longer lead times and increasing transportation rates, companies may find it easier to justify moving to a local supplier that’s moderately more expensive than one located across the globe, says Kamala Raman, vice president and analyst in Gartner’s supply chain group.
Near- and reshoring isn’t always the solution. Given generally higher labor costs, reshoring often is best suited for highly automated operations, says Bharat Kapoor, global lead and founder of A.T. Kearney PERLabs. Companies in hyper-competitive markets may find customers less willing to pay higher prices for goods made in America, even if they claim to prefer them, he adds.
Lesson 11 – The race is on
Keep a mix of transportation procurement options. While shippers often can find lower transportation rates if they look hard enough, “you’ll generally follow the market rate,” says Bob McCloskey, director of logistics and distribution with Clarios, a battery technology provider. Trying to fight this can consume time and hamper operations, as you often end up without the trucks you need.
Instead, it’s generally more productive to try to mitigate costs by, for instance, boosting utilization and optimizing your network. “Focus on things you can control,” McCloskey says.
Lesson 12 – Time after time
Rethink just-in-time. A just-in-time (JIT) inventory approach “is great for cash flow, but when there’s stress in the supply chain, it’s painful,” says Nathan Vazquez, co-founder and CEO with Pipsticks, a monthly stickers subscription service.
While Pipsticks used to get products two to three weeks before they needed to be turned around, they’re now striving to get them two months ahead of time. This allows for transportation delays and cuts the risk of late shipments and unhappy customers. “As painful as it is to hold more inventory, we have to,” Vazquez says.
“There’s a shift away from just-in-time because it becomes so uncertain if a company can get the right stock when they need it,” Raman says.
This shift may be temporary. “JIT is too powerful for it not to come back,” Derry says, given the potential cost savings.
Technology and communication advances continue to make JIT more feasible. For instance, a decade ago, a customer might not know for weeks that a supplier abroad had to temporarily shut down, Derry says. With today’s social media and communication tools, they’ll likely know within hours.
Lesson 13 – It’s a small world
Consider your entire supply chain ecosystem. Companies need to look outside their four walls and even their immediate suppliers, and instead consider their entire supply chain ecosystem. “Think globally and holistically,” Gupta says.
For example, if a supplier’s supplier is disrupted, what is the likely impact to your operations?
Lesson 14 – Lean on me
Interact with customers. For most of the 25 years he has been in supply chain, Billy Duty, head of global supply with BYK, a division of Altana, seldom met with customers. Now, he spends about half his time with them.
The old model of purchasing agents talking only to salespeople, especially for key customers, is thrown out the window, he says. The reason? Few salespeople have all the information customers need.
“For instance, a customer that says, ‘our line shuts down if we don’t have this material by the 25th; what can you do?’ likely needs to talk with supply chain, not sales,” Duty adds.
This probably isn’t a sustainable model, given the other responsibilities supply chain executive have. However, it may drive development of technology that allows customer service or sales reps to offer the needed information, he says.
Lesson 15 – Stronger
Take steps toward resilience. While resilience has proven to be critical, it also doesn’t require a binary yes/no approach, Raman says. Instead, it’s actions on spectrum.
For instance, a company might decide to thoroughly qualify every single supplier, or only those whose business exceeds a certain level. No matter a company’s budget, they can identify actions that boost resilience without breaking the budget.
Lesson 16 – we are the champions
Look at the bright side. The challenges of the past few years have exacted a toll on many people and organizations. Yet, there’s a bright side for many supply chain professionals: The critical role of supply chain innovation and strategic execution has been thrust into the spotlight.
While the pandemic revealed serious gaps and vulnerabilities, Skurtovich says it also “highlighted many strengths and differentiating strategies that enabled some organizations to not just survive, but thrive.”
Getting Better All the Time
The internet has made it easy for everyone to go direct to the source of whatever they need. But procurement’s relevance as an intermediary isn’t going down.
For decades, procurement teams have been connecting people across their organizations with suppliers capable of delivering what those people need, when they need it, at the right price. And for a very long time, that was enough to see the department deliver strong, consistent value to the business.
But with the rise of the internet and e-commerce came new abilities and total empowerment for individuals. The veil was lifted on suppliers, and consumers and employees gained the power to source what they need direct from global suppliers.
It looked like the end of an era for the procurement function. And to a certain extent, it was. With direct buying options available to everyone, issues like maverick buying have rocketed, creating challenges for procurement teams to navigate.
But despite this newfound power now resting in the hands of business teams for many years, procurement’s relevance hasn’t declined—far from it in fact.
Just when it looked like the days of intermediaries were numbered, procurement teams leaned into their role as connectors across multiple departments, and used their unique position in the business to drive more value and become more strategically relevant than ever before.
A New Kind of Intermediary
The procurement department of today is still an intermediary, just not as we knew it before. Sourcing the resources that teams need to succeed still makes up a huge part of what procurement teams do. But today, leading procurement teams are assuming a new role as a strategic intermediary between product, sales, finance, and supply chain teams.
Procurement is the only function that works closely with all of those teams, making it uniquely positioned to drive value across them. As each department becomes more data-driven in its operations and operationalizes data in new ways, procurement teams are exposed to those insights and can use them in their engagements with other teams.
The result is a whole new kind of intermediary—one that translates insights from silos into wider business actions as part of its day-to-day activities. It’s still the procurement team we always knew, but it’s also a powerful driver of strategic value through this new role.
Like any good intermediary, leading procurement teams don’t just take insights and value from one point and move them to another. When insights are gathered from product, sales, finance, and supply chain teams, procurement teams add their own insights to the mix, providing value-adding context.
Often, it’s this context that ties all those diverse insights together and helps translate them into clear actions that can meet the needs of multiple teams at once.
The best way to illustrate this is by walking through a quick example. The situation starts with four siloed insights, held within individual departments, each lacking the wider context needed to bring them to the attention of the business at large:
In sales, teams have noticed an increase in customer objections based on the sustainability of materials used in product packaging.
In the supply chain, logistics operators are concerned about emerging restrictions that may limit the use of certain non-sustainable packaging.
In finance, a gradual decline in revenue can be seen across long-standing product lines, indicating the possible need for a refresh.
In product development, teams are actively seeking opportunities to incorporate new materials into existing products, to reduce waste.
Each of those departments is capable of actioning those points on their own. But, through close collaboration with them all, the procurement team is uniquely positioned to see the clear line that runs between.
Once you add the procurement team’s insight into the mix—that its category intelligence efforts have identified an opportunity to source a new kind of recyclable packaging at a low cost—five distinct trends can be seamlessly translated into a single strategic business action.
Why It’s Time for an Intermediary to Have a Seat at the Strategic Table
The word intermediary doesn’t scream strategic value. But by using their position at the nexus of multiple lines of business, procurement teams have become exactly that—a highly relevant intermediary, capable of delivering strong strategic value.
Now more than ever, it’s crucial that the procurement department is given a seat at the strategic table, so that its aggregated and contextualised insights can be translated into strategic product, pricing, and promotion decisions that deliver measurable value.
—Omer Abdullah, co-founder, The Smart Cube