The power balance inherent in supply chains typically ebbs and flows. For suppliers, procurement teams have traditionally been the feared gatekeepers who prevent them from securing the terms of business they want. For small companies in particular, it could often feel like one small strike of procurement red tape would be enough to kill the deal that would keep that business afloat.
However, with COVID putting so much strain on supply chains, the power balance shifted in favour of small local suppliers. Companies of all types were forced to pivot their business models, but large Australian and New Zealand firms with international supply chains, in particular, have been required to quickly build relationships with new local suppliers.
This has forced procurement teams to change their game. With international trade so restricted, procurement teams have suddenly become the suppliers’ best friend, even going so far as to speed up payments in order to secure stock ahead of competitors, all at advantageous terms to suppliers.
Ordinarily it would be fair for suppliers to fear a return to more normalised patterns of behavior now that lockdowns are easing. But small Australian and New Zealand suppliers should rejoice because there are a number of factors suggesting this behaviour change will be more permanent.
A permanent shift
It’s a cliche now to argue that the pandemic has had a far-reaching impact on people’s working habits. The genie is out of the bottle – people expect to be able to work from home and organisations need to adapt to this or risk losing talent to competitors. The same can be said for supply chains for while global markets are emerging from lockdowns, things may never be the same again.
New hotspots in export markets are causing production to be disrupted, whilst emerging variants of the virus make it hard to be confident that international trade will return back to normal for some time. The World Trade Organization’s latest Goods Barometer suggests that world trade might start to lag again as these types of issues continue to arise.
Most immediately, international shipping, on which Australian and New Zealand businesses are so reliant, is suffering a major COVID hangover. Shipping has always been a commodity – just like gold and oil, it has a specific supply. Now, with economies opening up, those at the top of the food chain are paying over the odds to secure container space. At the end of October, Woolworths CEO Brad Banducci lamented the fact that container costs had more than quadrupled, from $1000 to $4500 in the last 12 months, putting a drag on revenues.
As a result, retailers are having to change their business models. Australian and New Zealand retailers are moving away from just-in-time delivery models and are instead ordering stock 8-12 months in advance. All of this is combining to put pressure on companies to develop their local supply chains by sourcing more goods locally and offering good suppliers preferential terms to secure stock ahead of competitors.
At the same time, the government’s new Payment Times Reporting framework is mandating large companies (with over $100m in annual revenue) to be transparent about the payment terms they offer suppliers. By shining a light on companies that offer poor payment terms, CFOs and finance teams will be under pressure to pay suppliers quicker and this will filter down to procurement teams.
Good procurement practice can cause a headache for other teams
During the pandemic, we saw numerous examples of a shift to a ‘team mentality’ amongst buyers and suppliers, particularly when faced with sourcing PPE and IT equipment. But the above factors mean that procurement teams will have to build more positive relationships with local Australian and New Zealand suppliers for the long term as well.
This isn’t just about benevolence. Sourcing locally makes great business sense in a world where supply chain uncertainty may be the norm. Zara’s owner, Inditex, has recently heralded the idea of “proximity sourcing” for helping the fashion giant weather the pandemic, with an existing reliance on suppliers closer to its headquarters and in a number of regions. This has enabled the business to weather the pandemic better than its counterparts.
But this new strategy means that procurement teams are having to onboard new suppliers at a faster rate and this is putting pressure on systems and other areas of the business. Formerly, procurement teams could use antiquated systems to onboard new suppliers over a 6 month period, giving finance, IT and compliance teams plenty of time to integrate the new supplier into the system. Finance teams are now under increased time pressure to process invoices, as well as new terms of payments for suppliers who are demanding payment in advance or specific terms of trade. All while using existing systems/processes that may not accommodate these changes. IT teams are having to integrate new partners, all of whom are using different technology and software. Security teams, aware that cybercriminals are increasingly moving through suppliers into other companies, now have new integrations and endpoints to secure. All of these teams will be working to 2-3 technology plans and any rapid change in customers or suppliers will upset this.
With new suppliers now being onboarded more rapidly, the legacy tech and spreadsheet approach used by procurement teams are no longer cutting it. Smart procurement technology that automates the customer-supplier handshake, systems integration, and even gives intelligent forecasting for future stock requirements, is the only way that this new procurement landscape can be navigated. So while procurement teams are now being seen in a new light, they’ll need to be smart in keeping suppliers, and their colleagues, on side.