Why Procurement Is the Key to Preparing for the Next Supply Chain Crisis
There is no clear sign when the global supply chain crisis will end. It began during the COVID-19 pandemic, worsened with the surge in demand that followed the lifting of national lockdowns around the world, and further deepened amid recent global events.
Some corporate leaders contend that the crisis, triggered by these exceptional events, could not have been foreseen. As such, they argue, there was nothing they could have done to anticipate or prepare for the supply chain crisis. We think, however, that business leaders can do more to be proactive by taking steps to make their supply chain more resilient, flexible, and robust in times of crisis.
To start, business leaders should put their suppliers—and their procurement executives who “own” the corporate relationship with suppliers—at the heart of their company. It is a striking fact that, while suppliers typically account for 60% of a company’s expenditure, CEOs spend a fraction of their time on supplier issues. Indeed, according to research by Harvard Business School’s Michael Porter and Nitin Nohria, CEOs spend just 1% of their time with suppliers.
In effect, it means that CEOs spend virtually no time either thinking about or being actively involved in how their company spends more than half of its budget. That’s a mismatch with potentially devastating consequences, of the kind that many companies are dealing with now.
After doing this, business leaders should recommend their chief procurement officer transition from a “just-in-time” to a “just-in-case” approach to supply chain management. To do this, they should first invest in risk intelligence and strategic foresight, creating a team of procurement super-forecasters equipped with the latest AI-powered sensing technology. One might wonder why companies should bother investing in predicting the unpredictable. After all, isn’t the pandemic a “black swan” event—random and highly improbable?
Actually, it isn’t. Prior to the outbreak, it was highly probable and perfectly predictable. Three months before the outbreak, a panel of experts convened by the World Health Organization and the World Bank reported that “there is a very real threat of a rapidly moving, highly lethal pandemic of a respiratory pathogen killing 50 to 80 million people.” So, if it can be predicted, it can be prepared for.
Risk Mitigation Checklist
Finally, and most importantly, business leaders should take a series of risk mitigation actions that encompass the three elements of the supply chain: sourcing the raw materials, components, and other parts of products; manufacturing the products; and delivering the parts to factories and the products to customers.
For sourcing, companies should optimize (which today can mean increase, not just reduce) the inventory of raw materials and other key components, persuade suppliers to shift some production to more convenient locations, qualify new ready-to-go suppliers in various countries, and commit to a program of dual or multiple sourcing, so that the supply of essential components is never interrupted by problems with one supplier.
For manufacturing, they should review their make-or-buy strategy, consider investing in digital technologies, such as 3D printing, qualify ready-to-go contract manufacturers who can step up production in cases of disruption, and switch manufacturing to locations at home (reshoring), closer to home (nearshoring), or closer to consumer markets (regionalization).
For delivering, they should qualify new and additional distribution partners, rethink types of freight transport (land, air, or ocean), and shift warehousing and finished goods distribution closer to consumer markets.
If business leaders take these steps and, above all, put their procurement function at the heart of their company, they can expect not only to protect their operations amid the continuing disruptions caused by the current supply chain crisis, but to profit in the broadest sense of the word when the next disruptive event happens—as it surely will.