October 31, 2022 | Procurement Strategy
Priorities have changed for procurement teams in the last few years, and so have the challenges that they are expected to overcome.
Besides managing rising input costs and reducing supplier risk amid record inflation and the war in Ukraine, they have in their remit new tasks such as ensuring supplier diversity and meeting tough sustainability goals.
This blog looks at the scale of these new challenges and what tools and techniques procurement folks need today to deliver continuous value to the organization.
Inflation has today become a major challenge for procurement teams globally due to the rising costs of raw materials and labor and the devaluation of currencies in some countries.
The Russia-Ukraine war along with lingering supply chain issues has led to an increase in raw materials prices. This is especially true for commodities such as iron, copper, and aluminum.
The rising demand for skilled workers too has pushed up the cost of labor in many developed countries. This has been exacerbated by the shortage of skilled personnel in some industries.
The devaluation of currencies in some countries has also helped the cost of goods manufactured to fall while the price of goods manufactured in other countries has increased.
Suppliers have always been expected to meet certain social and environmental standards, but the task of assessing them was easier than it is now. In the early 2000s, legislation such as the California Transparency in Supply Chains Act and the European Union’s requirements to disclose supplier data made supplier due diligence necessary.
Now, companies are expected to work with suppliers to achieve goals such as reducing environmental impact and reducing the risk of human rights violations.
For sustainability goals to be achieved, procurement teams must find ways to keep suppliers engaged in continuous improvement. Suppliers should be treated as partners, not just transactional customers. This also means that procurement teams must engage with their suppliers to understand their challenges, capacity, and the impact of suppliers’ actions on the company’s operations.
The risk of non-compliance with regulations and standards has always been present. However, this risk has significantly increased due to the higher number of regulations.
While compliance used to be a concern in a few industries earlier, every department must now be careful to avoid non-compliance. There are more regulations than ever before, and they cover a wider range of issues.
New regulations have been introduced in industries such as aviation and healthcare. Other regulations have been amended to include more elements. For example, procurement has been added to the list of critical operational areas in the Food and Drug Administration’s regulations.
As more businesses are required to comply with regulations, the risk of non-compliance has increased. The potential consequences of non-compliance have also increased as governments have become stricter. New technology and data sources have become control points for compliance. This has created challenges for procurement to meet the expectations of compliance officers.
The concept of supplier diversity has evolved from a focus on racial and gender diversity to an expectation of suppliers to meet certain standards. In the early days of supplier diversity, there was a focus on meeting racial and gender-based diversity requirements.
Companies were required to have a certain percentage of minority- or women-owned suppliers.
The inaccuracy of vendor data is another key challenge for procurement teams. The addition of a high number of new and small vendors to the procurement database and the increased use of e-commerce have caused vendor data inaccuracy.
Organizations have added many new vendors in the past decade, and as they do so, they often enter incorrect data. Vendors may be entered with wrong item descriptions, address, contact numbers or wrong payment terms.
Many companies have also added small vendors, and the procurement system is not equipped to match the data of a small vendor with the information in the database.
Data accuracy has also been affected by the increased use of e-commerce. There have been cases in which the item description was entered incorrectly, or the dimensions and weight were entered incorrectly, or terms were entered incorrectly.
The final challenge for procurement teams is risk management. This concerns the risk of losing key suppliers and the associated risks of disruptions to the supply chain. Companies should aim to avoid losing key suppliers, but there are times when this happens.
Another risk is the inability to accurately forecast demand for products and services. If you don’t have the necessary information, such as sales forecasts, you face the risk of making bad sourcing decisions.
There are also times when a supplier fails to deliver because of varied reasons. These can include natural disasters such as hurricanes, floods, or tsunamis, financial issues such as insolvency, or changes in the law. In such situations, procurement teams must find alternative sources. They should know which vendors are critical, how to find alternative vendors for critical products, and how to change the supply chain if it is disrupted.
Procurement teams face several challenges today. These challenges range from managing rising input costs, reducing supplier risks and the risk of non-compliance, to managing the accuracy of vendor data and the risk of disruptions to the supply chain.
The good news is that procurement teams have the tools and techniques they need to face these challenges. They must be prepared to use them and be strategic in the way they drive value to the organization.