Why Your Business Needs To Make Procurement A Strategic Function

The past 18 months has been tough on businesses and global supply chains, with COVID-19 exposing vulnerabilities in several risk management plans.

Revenue took a hit, global distribution was interrupted, and some companies paused production or went out of business.

Ardent Partners research, released as awareness of the pandemic’s threat was starting to grow, found just nine per cent of all businesses viewed improving supply risk management as a priority in the year ahead. It also found 79 per cent lacked a comprehensive risk management program for strategic suppliers.

Strategies and processes that worked in the past are no longer effective. Procurement can drive a more proactive approach to risk mitigation in the face of continued pandemic-related disruption, increased climate risk, and other ongoing threats. This need to manage risk and minimise disruption through supply chain improvements is driving digital investment and is where procurement adds significant value to any organisation.

The relationship between digitalisation and risk

Reports show that businesses with digital procurement strategies were able to navigate the challenges of the pandemic more easily. A big benefit of digitalisation is real-time information sharing, which allows you to put a plan of action in place should the unavoidable happen. Getting this early warning of potential issues may make all the difference in prevention or initiating a quick reaction to events, which allows your organisation to manage the unexpected.

Despite this, Deloitte’s 2021 Chief Procurement Officer (CPO) Survey found just 26 per cent of organisations are formally tracking supplier risk. And only 15 per cent of chief procurement officers have visibility of risks beyond their main suppliers.

Risk factors change quickly, making them difficult to manage without automating supplier risk management. Technology helps monitor risks continuously, giving greater visibility into your true exposure. Employees are freed from the heavy workloads of gathering and validating just a small percentage of the data that artificial intelligence (AI) can deal with.

This kind of risk management is the most effective way to evaluate end-to-end supply chains and prevent, or at least prepare for, future disruptions. The increased awareness delivered by a digital strategy makes it easier to identify, scale, and evaluate risk.

Strategies to consider

It’s no longer enough to conduct annual supplier risk assessments or to do reviews following major risk events. Continuous monitoring and ongoing risk intelligence are essential.

Deloitte research found 47 per cent of chief procurement officers are planning to expand their overall supply base. Engaging multiple suppliers rather than creating a single point of (potential) failure with a sole supplier is an effective way to reduce supply chain risk.

Planning category strategies works best when the entire organisation gets involved in setting intelligent spend management strategies. To decide the primary goals for categories it’s critical to get as broad a view as possible and think about everything that impacts this strategy. It’s important to get as many opinions as possible to make sure you align the direction with your company’s needs.

Mckinsey wrote that now is an ideal time to reimagine category strategies as the COVID-19 pandemic has encouraged a re-evaluation of processes, value pools, and business models. This delivers new opportunities for growth and collaboration with our suppliers, which in turn drives innovation.

Advanced digital solutions will have a growing impact on procurement and supply chains during the next few years, as the need for improved risk-adjusted performance increases uptake of the technology.

With a better understanding of risk, it’s easier to make plans to deal with the consequences. Analytics improves collaboration with suppliers and enables large quantities of data to be scanned for risk signals.

Where to next? Digitalisation’s opportunity for procurement

The Deloitte 2021 CPO survey found high performing CPOs are four to five times more likely to have fully deployed advanced analytics/visualisation tools and 18 times more likely to be using AI/cognitive capabilities.

The report suggests analytics is “the most exciting and impactful digital area” in procurement and value chains. But it also noted: “No matter how many analytical capabilities an organisation adds to its armoury, bad data often translates into bad analytics.” Organisations need to build employee and stakeholder trust in these technologies, switching employees into more strategic roles that automation can’t handle.

A Hackett group report stated that world class procurement is five times more likely to be viewed as a business partner, delivers 2.2 times return on investment, and has 12 per cent more strategic full-time equivalents.

There is awareness of the need to change, with around half of CPOs saying they have a development gap in their ‘digital aptitude’ and 43 per cent naming a gap in analytics specifically.

The report notes the main barriers to uptake are lack of funding, data quality, and poor integration across applications. Meanwhile, the top enablers are maintaining a holistic view of digital transformation and a clear digital strategy. It takes time to make the best use of these technologies and most organisations will need to learn from some failures along the way. But the benefits make perseverance worthwhile.

Digitalisation is an ongoing journey. Technology is constantly evolving and so too are risks. Now is the time to push ahead with your digital procurement strategy. Your organisation is counting on you to do so.