The role of procurement is about ensuring that business operations continue like clockwork no matter how disrupted the business environment is. This involves understanding the current environment as well as foreseeing the potential future environments and preparing for them; specifically market changes, selecting and evaluating new vendors, cutting costs without adding risk to the business, negotiating and renegotiating contracts, ensuring traceability of all incoming raw materials, and reducing risk along the supply chain. The challenge is that all businesses currently operate in a VUCA world, meaning that there is a constant pressure of market volatility, uncertainty, complexity, and ambiguity. Going forward, businesses are likely going to be operating in more uncertainty and facing more unexpected crises, placing an extra burden on the Procurement and Supply Chain functions.
Supply chain disruptions are nothing new. According to the World Economic Forum, comparative figures between 2019 and 2020 reveal that Chinese exports to the EU fell by 29.9%, while exports to, and imports from the US tumbled 27% and 8% respectively. From global trade disputes to Brexit, volatile exchange rates, fluctuating commodity prices, civil unrest, and the global pandemic, procurement has needed to be more agile and resilient than ever before. These challenges have directly impacted the procurement of raw materials and intermediate goods, which are shipped as a part of the global value chain, and then usually assembled in another country. Within the global value chain, China is a large producer of components and assemblies, but with the recent pandemic, many of these distribution channels were shut down with no notification and very little time to replace suppliers.
As a means of proactive response, businesses should look at a four-step strategy to build procurement resilience in the wake of global vulnerabilities.
Step 1: Anticipate and plan for uncertainty
Today, the rigorous process of gathering as well as interpreting supplier, market, and environmental information is being replaced with a data-driven approach. This enables real-time decision-making with businesses building AI-driven integrated data ecosystems that are underpinned by predictive analytics. Resultant insights can then be applied in forward planning on both strategy and performance.
In addition to outsourcing solutions to understand the changing needs of the macro environment, manufacturers and distributors can use technologies such as Enterprise Resource Planning to accurately forecast demand, identify stock availability, establish supplier lead times, cost, material requirements, contingency stock requirements, and warehouse capacity constraints, and integrate this all into their unique business model.
By making a direct link between supply and demand, manufacturers and distributors can anticipate and better plan for uncertainty. This will ultimately improve the cash flow of the organization because procurement teams can better determine purchasing requirements based upon demand, and hedge against the obsolesce and waste of critical raw materials stock.
Step 2: Embrace the limitless potential of digitalization
With the pandemic and global lockdowns, many manufacturers began to realize the true potential of digital transformation. By embracing a digital approach, procurement can form a real-time part of business operations by improving agility and preventing wastage by only procuring and storing the required raw materials. Further benefits can be found by storing less inventory and improving the ability to rapidly address changes in demand.
Digitalization can assist strategic sourcing to become more predictive, transactional procurement more automated, and supplier relationship management more proactive. Digital procurement solutions are enabling the future by providing access to previously unavailable insights or bringing order to massive (but unstructured) data sets, ultimately driving more complex analysis and better supplier strategies; enabling more efficient operations.
A SYSPRO customer that benefitted from the potential of digitalization is Wen Ken. Founded in 1937, Wen Ken Group has more than 80 years’ experience in the research, development, production, and marketing of Traditional Chinese Medicine (TCM), natural medicine, pharmaceuticals, and Over-the-Counter health products. To support business growth, Wen Ken needed to replace its existing disparate systems with a single fully-integrated, robust planning solution. Visibility into real-time stock information was lacking, and the company’s data was in separate systems. According to Fu Shou Jeen, Executive Director of Wen Ken “One of the major benefits we’ve experienced has been the improvement of inventory and costing accuracy from 92% to 99.5%,” The real-time, accurate data has also enabled Wen Ken’s management team to make financial decisions with greater insight.
Step 3: Enable end-to-end supply chain visibility
World crises have resulted in procurement teams scrambling for alternative and locally-based suppliers to ensure that they can still fulfill existing orders and continue to produce with new orders. End-to-end supply chain visibility is therefore a necessity to ensure procurement accuracy and resilience. This is needed to provide a single platform where everything from early-stage planning based on forecasts through Master Production Schedules (MPS) to final delivery can be tracked and traced in real-time on a global scale. These advanced insights are needed to improve customer service, reduce costs, help with regulatory directives, and mitigate interruptions that will affect supplier inventory levels and ultimately product delivery. With customers demanding better service, embedded AI capabilities provide real-time intelligence, actionable insights, and recommendations that reduce disruption time from days to hours, improving customer service in line with expectations.
Supply chain visibility adds many other advantages for today’s global businesses. It allows them to reduce complexity, improve communication throughout the organization, remain nimble, and keep up with a changing and complex regulatory landscape.
With supply chain visibility, businesses can make the correct decisions in real-time. What follows is improvements in operational efficiency, improved profits – and ultimately satisfied customers.
Step 4: Focus on building a robust procurement model
There are no standard business models to help businesses to manage what we are currently facing. This pandemic has exposed the fragility and the thin margins on which many global businesses run. Highly indebted companies, working from lean inventory, supported by just-in-time supply chains, and staffed by short-term contractors are suffering the longer-term impact of market unpredictability. Companies have realized that by encouraging their procurement departments to pursue the holy grail of greater efficiency through wholesale cost-cutting, have sacrificed robustness, resilience, and effectiveness. In many cases, it has turned out they have sacrificed the business itself.
Manufacturers and distributors need to identify their own business model that will suit their own business. Copying competitors is no longer viable. They will also have to consider how to reengineer their supply chains to be resilient by design, factoring in increased complexity and uncertainty as to the new normal. In the months and years ahead, effective supply chain management will be all about agility and finding the perfect balance between just-in-time processes and just-in-case scenarios while reducing risk as much as possible.
The ERP advantage
Enterprise Resource Planning (ERP) can help procurement to remain resilient in several ways. First and foremost, an ERP brings a single integrated platform that shares all of the information across all functions. This integration allows manufacturers to optimize inventory forecasting capabilities to improve management of purchasing requirements, while alternative potential suppliers can be identified through supplier portals, and invitations using a Request For Information or even a Request For Quote can be shared with suppliers. Bearing in mind that the ongoing procurement of raw materials can quickly consume all of the cash reserves of the organization and needs to be agreed by the organizational leadership if it places the organization at any risk. The integrated nature of an ERP system allows everyone to have the full picture which improves the quality of the decision making within the organization.
Technologies such as AI embedded within your ERP platform can additionally assist with data-driven insights to have sufficient visibility of all relevant activities.
Global crises are an inevitable factor of life. By planning for the unknown, implementing the right technology for end-to-end supplier visibility, and building a robust procurement model, manufacturers and distributors can ensure procurement resilience in a VUCA world.