This month, in his exclusive PASA column ‘Gordon’s Window’, Gordon Donovan, VP of Global Procurement Research at SAP, provides a handy expert summary of October’s global procurement research.
Save your own time reading research when you can get the key takeaways in one place!
Read on to find out about the decisions CEOs have made and what they see on the horizon, the benefits organisations have derived from automated negotiations, and the four mega trends that will shape the future of procurement.
Proxima Supply Chain Barometer
The Proxima Supply Chain Barometer is a 2000 person survey of CEOs from the US and UK, reflecting on decisions they have made and what they see on the horizon.
The context, of course, is the huge changes wrought from inflation and the decisions that have been made in relation to that. However, with markets now stabilising, the question being asked is: what lies ahead?
Some of the report’s key takeaways include:
- 51 percent of CEOs said they expect to spend more time on supply chain issues in the next 12 months, with 64 percent saying that they expect to spend between 5-20 percent of their time
- 34 percent stated that they had a formal plan for decarbonising their supply chains, while 32 percent have already begun strategic conversations with their suppliers
- 33 percent of linked executives pay to sustainability targets, while main barriers are complexity (25 percent) and cost (23 percent)
- 90 percent stated that supply chain resilience is a challenge and 43 percent have begun on/nearshoring parts of their supply chain, while 69 percent stated they have concerns about the potential for human rights issues in their supply chains
It’s interesting that the report is based on CEOs, as this ties in well to the NC state research (previously covered) that identified that it’s CEOs who “own sustainability”.
AQPC Procure to Pay Governance & AQPC Sourcing Transparency
This month saw a couple of blogs from AQPC.
In the first blog, AQPC gathered insight into how organisations are governing and managing their procure-to-pay (P2P) processes. It reveals a lack of integration between procurement and accounts payable (AP) in 70 percent of organisations.
The key data points from organisations that lack procurement and accounts payable integration are, as follows:
- In 28 percent of organisations, procurement and AP are separate teams with separate reporting lines
- In 42 percent of organisations, the two functions are separate teams that at least report to the same C-suite executive
- Only 30 percent of organisations report having an integrated procure-to-pay team reporting to one executive
When the P2P process is disconnected, it can have a negative impact on suppliers (as well as internal cash flow). The impact of supplier risk for organisations has risen to the surface more prominently in the last 12 months than before, and this report suggests that one solution is to implement a global process owner. The owner should have an end-to-end view of the whole process.
The main takeaway being, that to focus on effectively managing the end-to-end process, organisations need to shift from thinking of procurement and AP as separate processes and implement governance that enables them to become an integrated, seamless end-to-end process.
The second AQPC report was from a survey of 185 participants, carried out with BCG, discussing transparency into suppliers, locations and the risk management strategies being followed.
There were some interesting points included:
- 37 percent deploy multi-sourcing across all categories and recovery strategies for single-sourced categories
- 25 percent identify critical sub-categories to deploy multi-sourcing strategy and rapid recovery for single-sourced items
- 20 percent employ tiered, multi-sourcing strategies for different sub-categories and well-defined recovery strategies for single-sourced items across the full bill of materials
- Only 18 percent didn’t have multi-source strategies in place
It’s clear that these strategies are gaining traction.
It was interesting that from a supplier selection perspective, how much the location of the supplier was a factor. Priorities are pretty evenly split between 26 percent pure cost focused, 29 percent focused on high-risk locations and ad hoc, for 24 percent location is a key factor and 21 percent its a cross functional strategic approach.
MIT: Procurement in the Age of Automation
In many ways, this article and the Scanmarket E-Auction report could be read together.
The MIT paper details the benefits organisations have derived from automated negotiations, what it takes to persuade stakeholders to use the technology, and how to incorporate automation into procurement processes.
The article is well researched and written, citing a number of examples of how organisations such as Google, Maersk and Walmart have been using automated negotiations (or E-auctions) in their process, and details the categories that they have used them for; both for goods and services including media and marketing agency.
One example given was of Walmart having up to 150 suppliers participating simultaneously, conducting multiple rounds of negotiation in two hours.
In summary, the paper stated that automating negotiations dramatically increases the number of suppliers and negotiation rounds that a company can include in a significantly shorter period of time.
Companies that have scaled their automated negotiations have matched the procurement strategy for a particular spending category and market conditions with the best automation processes and tools.
The paper defines six key practices to overcome resistance and deliver value:
- Mandate consideration not use
- Make Success visible
- Prequalify suppliers
- Treat non incumbent suppliers fairly
- Unleash AI to improve deals with tail suppliers
- Create a formal support structure
Scanmarket E- Auction
Hot on the heels of the above research paper, here’s what Scanmarket delivered.
This is a quarterly paper that looks at the numbers and results of auctions held.
The latest report stated that the number of executed e-Auction events in Q2 increased to a significant 39.18 percent when compared to Q1.
This rise suggests e-Auction adoption is trending favourably as a recognised reliable and effective means to save across various categories.
Q2 2023 presented a staggering 11.32 percent in average savings, moving just slightly higher than that of Q1’s 11.31 percent. Interestingly, the most auctioned category was services.
State of Supplier Diversity 2023
The annual report from Supplier.io was launched alongside a webinar which was co-delivered with Chris Sawchuk of the Hackett group.
Of the information that was included, 60 percent of respondents (216) have a formal supplier diversity program, with 44 percent being under two-years-old.
The main drivers of diversity are alignment and to improve competitiveness within the supply chain.
Interestingly, compliance ranked as the lowest quoted driver, which conflicts with other reports recently released (such as the Deloitte CPO report).
Data quality saw the biggest improvements this year, closely followed by program processes with workload, accuracy of data and proving accuracy to leadership as the three top barriers.
Two-thirds of respondents use third parties’ data to monitor the diversity status of suppliers, which moved it up two spots to the top way that companies track status.
Meanwhile, over half (57 percent) integrate diversity metrics into their S2P systems.
Standard and Poor’s PMI Index
Last month in Gordon’s Window, the Supply Chain Volatility Index was reviewed. This month, it’s a Purchasing Manager Index(PMI)!
S&P Global release a monthly bulletin that tracks the changes in PMI, which is a measure of confidence in the global economies. Over 50 is good while under 50 is bad.
This month, it sits at 50.6 but the trend is downwards for the last quarter, suggesting some economic headwinds ahead. In fact, this is the lowest level since February (when it went back above 50).
It’s always useful to look at these types of indices to see how the global markets are trending, which is useful to consider when thinking of strategies.
The key takeaways from the PMI are:
- Convergence observed in August with a slower fall in manufacturing output paired with weaker services activity growth, leading to a weaker overall global growth momentum
- Selling price inflation eased albeit only slightly, suggesting that inflation remains sticky
- Softening demand conditions and falling backlogs don’t bode well for output in the coming months, though overall sentiment improved driven by improved services optimism
McKinsey: How Medium Size Business Can Better Manage Sourcing
While large companies can usually drive procurement cost savings with relative ease, small and medium-size enterprises (SMEs) typically lack the necessary scale despite being the backbone of many economies around the world.
The article suggests the following are typically what prevent SMEs from achieving value in procurement:
- A lack of spending transparency
- A myopic focus on the short term
- Talent gaps
- Underused digital tools and automation
- Exclusion of procurement and supply chain in business decisions
The article suggests that an interconnected series of five strategies, as listed below, will help SMEs achieve value. It states that all five together (rather than one alone) will be needed to drive the value that larger enterprises achieve.
- Establishing a CoE
- Improving forecasting
- Expanding use of digital procurement tools
- Gaining greater market intelligence
- Incorporating supplier-driven product improvements
McKinsey – A New Era for Procurement: Value Creation Across the Supply Chain
The ultimate read of the month is this one!
The world has experienced significant turmoil over the last three years, and whilst the results of this turmoil have shifted where/how people work and live, a new volatile environment faces many businesses.
To succeed, companies need to embed agility, technology and innovation. Above all, according to the article, their long-term success depends on a much less obvious action: changing what the organisation buys – whether it’s raw materials that meet new environmental standards or analytics talent who can identify what consumers most value.
The article states that four mega trends will shape the future of procurement:
An increasingly multipolar world that challenges the interconnectedness of global value chains. Procurement leaders are, therefore, shifting focus from cost improvement alone toward resiliency and assistance, to businesses that are adapting to volatile market conditions.
Advances in AI and machine learning that can quickly extract deep insights from previously unstructured data. Procurement can make a crucial contribution by enhancing spend transparency and capitalising on movements in supply markets
Demographic shifts, including shrinking workforces and rising skill gaps, that intensify competition for digital talent. The task for procurement departments is to attract and nurture candidates with the analytical skills and data competence needed to unlock value from agile ways of working and digital operating models
The transition to low-carbon energy, upending resource and energy systems. Procurement can take the lead in minimising value chain emissions, securing high-demand green materials, and managing the capital expenditure required to achieve net zero.
For procurement to remain as essential as it is, new “currencies of procurement” beyond traditional cost savings can help position procurement as a strategic function, in fact the following should serve as the guide for procurement to 2030:
Improving net margin by outperforming the market: in a more volatile era, value creation increasingly depends on offsetting market increases and swiftly capturing downward trends. Collaboration between procurement and sales, along with other functions, becomes vital for protecting and increasing margins while managing risk
Ensuring volume and enhancing growth: procurement can surpass mere order fulfilment and instead provide a more durable competitive advantage, strategically securing critical and scarce materials while maintaining supply chain flexibility
Leading value-chain emissions reduction: procurement can contribute critical support for net-zero objectives by securing green materials and decarbonising the supply base through localisation efforts and enhanced supplier co-innovation
The paper is worthy of a full read, particularly the evolution of operating models to agile teams (or as they are also called ‘sourcing squads’) as opposed to static category managers, which leans to some of the points above about breaking out of the silo of categories. Whether 2030 is realistic or not, we will find that out in the next seven years!
Watch this space for Gordon’s Window on November’s research, coming soon!
