It’s 2021 and many enterprises are still reeling from the unprecedented disruption of last year.
For supply chain and procurement leaders, there’s a lot more to do. And more questions than answers.
Get a big leg up with the GEP Outlook 2021 Report — featuring eight critical leadership themes that will help you navigate uncertainty and thrive in the new normal.
Published annually, the GEP Outlook Report is a trusted strategic guide for thousands of supply chain and procurement leaders across the world. Read today to inform and shape your strategy for 2021 and beyond.
Without question, 2020 will be remembered as an iconic year. It will take its place alongside 1347, 1816, 1855 and 1927 as years marked by generational lows.
Challenge after challenge dimmed the economic outlook: the COVID-19 pandemic, trade wars among major economies, environmental devastation from fires and hurricanes, the collapse of oil prices and political instability in populist regimes.
Indeed, the focus of most enterprise leaders shifted from dreaming about their strategic goals to merely treading water to meet day-to-day priorities, such as keeping employees safe, generating enough cash flow, securing supply and telling a credible story to Wall Street.
With 20 years of experience managing over $200 billion in spend annually for leading Fortune 500 and Global 2000 businesses, our firm of accomplished consultants and technology advisors offers perspective to help business leaders pick up the pieces in 2021.
The GEP Outlook 2021: Supply Chain and Procurement report synthesizes the priorities that will dominate the boardroom this year and beyond.
Tough decisions and choices lie ahead. Few people expect that 2021 will be as joyous as 2019 or the years just before. Also, few can afford to again face the sustained hardships they went through in 2020. The debate about what to do will be intense and there won’t be much breathing room to make these choices. Dust off pre-2020 plans? Leverage market uncertainty to turbocharge growth? Slash costs and expenses further to increase business health over time? In every way, the stakes are higher than ever. The need for supply chain and procurement leadership has never been greater.
There is less certainty about the year ahead than any other in recent memory. The first part of 2021 will surely be challenging for most businesses, governments and families. There is optimism though, however fleeting, and speculators are beginning to bet on better times ahead.
Supply chains were bent in 2020, and the fix will make them look different in the future
Supply chain resilience is emerging as a competitive differentiator, but it requires a fundamental shift in the approach to collaboration. An ecosystem of partners must connect and exchange information easily to enable better, faster choices and decisions. Transparency is imperative to facilitate real, resilient improvements.
A more resilient supply chain is, regrettably, a more complex one. As firms expand supply sources, broaden supply networks, increase redundancy and strike a new balance between flexibility and efficiency, complexity will skyrocket. Risk management capabilities to navigate this complexity will be a priority upgrade.
The very notion of what is essential for a business has changed. Businesses have secured work-from-home systems and invested in more flexible and scalable technologies — thereby changing how they value assets and supply networks. A business that is nimbler and more flexible will have different priorities.
Priorities have shifted for this year
Sustainability has long been an objective for activists, consumers and a growing majority of business leaders. The investor class has also now enthusiastically joined the cause, compelling leading companies to report and credibly track sustainability priorities. Sustainability is now a board-level topic.
Momentum is also building for diversity and inclusion. The social outrage and protests of 2020 will leave a lasting impression on procurement and supply chain leaders, who hold some of the keys to real change.
Efforts to select and manage this improved supply base will unlock and reinvigorate this movement. Leaders will integrate this directly into their procure-to-pay and supply chain systems.
The C-suite will challenge procurement and supply chain teams to operate differently
Many leading companies are entering 2021 as changed businesses — some as smaller entities, others wounded. After tough choices last year, leaders will find that the investment choices this year are even tougher. One clear but challenging task is coming to grips with a cost structure that reflects a post-pandemic world.
Procurement and supply chain teams will need to strike a new partnership model with finance, upgrading the teaming that normally occurs only in the budget process. Businesses need real-time budget availability to inform decisions, especially in a world where decisions need to be made rapidly and with more flexibility.
We are also approaching the era of automation. Digital technologies have advanced far enough for even core functionalities to be automated. Businesses will find that the gains in efficiency and effectiveness are comfortingly timely.
Global Business and Macroeconomic Trends for 2021
The global economy appears to be on a revival path after a year of pain, and a partial recovery from the ongoing recession is expected in 2021.
A more optimistic outlook is expected to largely be powered by the continuation of expansionary monetary and fiscal policies and low interest rates deployed in major economies to promote economic growth. However, the unemployment rate could remain a major issue if leading governments are ineffective in their actions to lower it.
Geopolitical matters – which somewhat took a back seat during the pandemic – are expected to come to the fore again with the transition to a new government in the United States, the Brexit political and trade deal in Europe and the unresolved India-China border dispute.
Global Growth Rebound Rests on Vaccines and Stimulus
With COVID-19 vaccines expected to reach the markets and begin ramping up by early 2021, optimism is beginning to replace gloom in economic forecasts. However, additional COVID-19 infection waves and subsequent lockdowns would impact short-run growth.
According to the International Monetary Fund (IMF), global GDP is expected to contract by 4.4% in 2020.1
However, the economic decline would have been worse if not for the fiscal and regulatory responses from governments and central banks, which tried to preserve disposable household income, protect enterprise cash flow and extend credit to a range of borrowers to prevent a collapse akin to the financial meltdown of 2008-09.2
These methods may well set the stage for a 2021 rebound of the world economy, which is projected to grow by 5.2%, according to the IMF.
In the IMF’s World Economic Outlook, GDP in the advanced economy group – where there was a lower-than-expected decline in economic activity due to government intervention – is projected to shrink by 5.8% in 2020 but grow by 3.9% in 2021.3
As for emerging market and developing economies, GDP is projected to contract by 3.3% in 2020 but rise to 6% in 2021.4 China, however, is expected to see a swift recovery. Its economy is projected to grow by 1.9% in 2020 and 8.2% in 2021.5
1.3 Energy Costs
Low Oil Demand May Keep Price Rally in Check
Crude oil prices returned to pre-pandemic levels amid vaccine news. Brent and West Texas Intermediate (WTI crude) were trading above $50 per barrel at the end of December, nearing the prices seen in February 2020.
However, oil consumption remains low and will take time to recover in 2021 due to uncertainty over full economic recovery, according to forecasters.6
This current oil market rally belies the bleak demand outlook from the International Energy Agency (IEA), which has revised its earlier oil demand estimate for 2020 and 2021 downward, as aviation fuel demand has yet to recover.7
The IEA projections are in line with OPEC’s forecast for 2021.8 As of December, the grouping of 13 oil exporting countries reduced its global oil demand growth forecast for 2021, pegging it at 95.89 million barrels per day (bpd).
However, IEA expects oil demand to reach nearly two-thirds of its former peak in 2020, driven mostly by gasoline and diesel demand.
On the supply side, the IEA projects oil output to increase by 1.4 million bpd in 2021, averaging 96.9 million bpd.
The hard-fought OPEC+ deal that has slowed production from two million to 500,000 bpd is likely to keep crude prices from rising in the coming months.9 The U.S. Energy Information Administration (EIA) also expects high global oil inventory levels and surplus crude oil production capacity to limit higher oil prices.
1.4 Interest Rates
Interest Rates Likely to Stay Low
Amid the pandemic, central banks worldwide have lowered interest rates to near or below zero to support their economies.10 Interest rates are likely to remain at those levels in the European Union, the U.K., Japan and Australia.11&12
After its policy meeting in December, the U.S. Federal Reserve expects to keep its interest rate as low as 0.25% through at least 2023.13 Rates may later return to around 2.5% after the economy recovers.14
In China, despite making modest cuts earlier in 2020, the People’s Bank of China has kept interest rates near 4%.15 Indications from China’s annual Central Economic Work Conference suggest that the benchmark lending rate will remain at that level through 2021.16
Low interest rates will encourage industries to invest and procure raw materials, raising demand across multiple sectors. This is expected to stimulate the global supply chain.
1.5 Labor Costs
Improved Hiring Outlook Along With Automation Focus
Mass layoffs, working hour losses and hiring freezes defined the global economic slowdown of 2020. The job market situation for this year does not appear as bleak.
Hiring sentiment is improving among companies around the world in the first quarter of 2021, according to a December survey of employers in 43 countries by ManpowerGroup.17 However, hiring activity is unlikely to reach pre-pandemic levels until July 2021.
Hiring intentions have improved the most among employers in the Asia-Pacific (APAC) region and the Americas, but employers in Europe enter 2021 more cautious.
Along with increased hiring activity, the focus for employers will be implementing new work models and reskilling and upskilling workers.
But there’s no denying the fact that COVID-19 has accelerated the shift toward automation as a strategy, impacting hiring activity in the long-term. In a survey by the World Economic Forum, 43% of businesses indicated they expected to cut workforce due to technology integration while 41% intended to increasingly use contractors for specialized tasks.18
Meanwhile, the unemployment rate as a percentage of the total labor force is likely to fall to 7.3% in the U.S. in 2021 compared to 2020 while increasing marginally in the EU and the U.K., according to the IMF.19 In the 37-member Organisation for Economic Co-operation and Development (OECD), the rate is projected to stay near 7% throughout the year, almost the same as in the last two quarters of 2020.20
Inflation Set to Increase Globally, Led by Asia-Pacific
Consumer prices fell due to slumping demand during the pandemic, which has kept inflation in advanced economies lower relative to 2019 and recent years. Falling prices will help stimulate demand in the short term. If they are left unmanaged, though, prices could drop into deflationary levels, which would create new challenges.
The inflation rate declined sharply in emerging and developing economies in the initial stages of the pandemic but has since risen in some countries such as India, Indonesia and Brazil.
In advanced economies, the inflation rate remained near 1.2% in the U.S. for 2020 and is projected to reach 1.28% in 2021.21 In the EU, the inflation rate fell to 0.3%22 and is expected to rise to 0.59% in 2021.23
Inflation is expected to rise in the Asia-Pacific (APAC) region, reflecting the expected strength of the recovery in APAC countries, which, in contrast to other parts of the world, largely avoided continued lockdowns due to the pandemic.24
Dollar Likely to Stay Weak, Gains for Euro and Yuan
The U.S. dollar remained weak through 2020 and is unlikely to rebound soon, according to forecasters.25 The U.S. Dollar Index has been sliding after peaking at around 94 in early November and was at around 90 at the end of December in comparison to a basket of other currencies.26
The prospects for the pound sterling have improved vis-à-vis the U.S. dollar as the U.K. enters 2021 with a Brexit deal in place.
The Canadian dollar is expected to be strong, with commodity demand increasing and crude oil prices firming up amid a market rally.27
The Euro has gained from the weakening U.S. dollar and low interest rates, and it is expected to get a further boost with the long-awaited investment deal28 between the European Union and China that opens the Chinese market for select European industries.
As for the yuan outlook, there is a likelihood of more gains with China’s economy and exports back on track, especially to the U.S.,29 after the COVID-19 impact.
COVID-19 Remains Top Geopolitical Risk
The biggest geopolitical disruptor of 2020 was COVID-19, and, for most of 2021 the virus will continue to shape events as countries start mass vaccinations, try to contain any new strains and boost self-reliance to reduce import dependence. The coming months will continue to test supply chains and procurement.30
There is no indication that the U.S.-China phase one trade deal is going to end or that the tariffs imposed on Chinese exports will go away under the new administration in the U.S.31
Expecting to maintain the status quo with the U.S., China’s economic road map for 2021 is to boost domestic demand and self-reliance as part of its so-called “dual circulation” strategy.32
Ties between India and China have also reached a new normal after a border dispute flare-up in 2020. India is actively rebalancing its growing economic dependencies on China.33
The Brexit deal is finally done, but many issues are unresolved, including a level playing field, levies, data protection and the status of financial firms. The implementation of the agreement in 2021 is likely to be messy.
Eight Leadership Themes for 2021
2.1 Building Resilience
Supply Chain Leaders Must Invest to Remain Resilient, Reduce Risks
The pandemic exposed how easily supply chains bend or break under intense duress. Plants were shut and borders closed. Shortages in personal protective equipment, ventilators34 and even everyday products, including toilet paper,35 were common.
As a result, there are now calls for critical supply chain stress tests36 — akin to the economic stress tests in banking following the Great Recession.37 In 2021, leading organizations will recognize the need for end-to-end transparency across the supply chain.
Just-in-time? It doesn’t work the same way during a global crisis
Managing effective supply chains is no longer only about lean processes or the lowest cost. The breakpoints are commonly found in the conditions of supply connections that occur in real time.
In the year ahead, procurement and supply chain leaders need to invest in making those connections seamless and resilient — without losing the advantages of efficiency.
Software that incorporates artificial intelligence, machine learning and automated data feeds can sense changes to demand before they occur. These are the new tools to manage supply and build real supply chain resilience.
The key to resilience will be visibility and close collaboration
1. Supplier visibility
As companies become global and complex, transparency beyond direct supply partners will be crucial. For example, aerospace and defense manufacturers in North America are moving beyond sourcing components only from China by developing regional supply networks in Mexico. The benefits: lower net transportation costs and an upskilled workforce.38 This requires a platform for joint supplier planning with full visibility into supplier networks at all levels to reduce lead times, costs and risks for the entire system.
2. Customer visibility
The disruption of 2020 has changed consumer behavior,39 highlighting the need for more collaboration with customers that is based on real-time forecasting. A business that masters this can react quickly and be demand-led.
For instance, in 2020, the food industry streamlined SKUs, redirected inventory, bypassed distribution centers and delivered direct to stores — or elsewhere — to meet demand.40
In the past, forecasts were built on spreadsheets and adapted marginally over time – often called “variance to plan,” or something similar. Software-based situation rooms are the future, allowing teams to collaborate in real time and respond efficiently.
Integrated business planning is a priority for 2021
A common challenge for supply chains has been that the individual components often optimize for themselves, creating a silo effect that is ineffective during a crisis. Rapid shifts in supply and demand forecasts may not be communicated constructively to all relevant teams, leading to short-term firefighting that makes the supply chain vulnerable.
Unifying internal processes will allow businesses to react more effectively and enable functions to communicate and share data, thereby reducing costs and improving reaction time.
With an integrated approach supported by tools that turn data into insights, businesses can allocate more resources to scenario planning and simulate more what-if conditions.
Risk management is no longer just an evaluation process
A resilient supply chain does not mean 100% risk prevention and avoidance. It treats risk management as a decision-making framework to mitigate the impact of negative events — and navigate to recover quickly. End-to-end visibility can help identify risk rapidly and allow short-term planning.
Many firms follow a three-phase approach to upgrade risk management capabilities. In the first phase, businesses understand the risk environment, identify and assess current risks, quantify and prioritize the risks, develop risk mitigation strategy and build a business case. Leaders need to decide on the course of action and prepare an implementation road map. In the final phase, risks are continuously managed. If and when they occur, businesses are fully prepared and aware of the actions that need to be taken to mitigate the impact of the risk.
Learn how GEP NEXXE, an AI-powered supply chain platform, is helping enterprises build visibility, agility and resilience.
2.2 Supply Networks
Supply Chain Network Strategies Are Changing Amid Sourcing Complexity
The paralysis caused by the pandemic underscored how sourcing and supplier complexity are forcing organizations to re-think and revise supply network strategies.
Throughout 2020, the traditional supply flows that powered industries were disrupted, even prompting some blue-chip firms to scramble to ensure supply.
Though the outlook for 2021 is more promising, COVID-19 spikes or other disrupters will continue to test supply chains.
Corporations can’t fully count on world governments. Most governments must balance the merits of economic stimulus to avoid economic depression against regulatory lockdowns to limit further spread41 of the virus, and the accumulation of debt to pay for it.
The nature of interdependent supply chains will pressure industries to revisit supplier localization decisions and redefine supplier value beyond cost alone to include speed, customization and reliability.42 This pressure also extends to revising just-in-time inventory methods, increasing safety stock and using more first-in, first-out approaches.43
To reshore, nearshore, stay offshore or dual source? These are the questions
Some U.S. enterprises, such as Harry’s, the men’s grooming products manufacturer, took on reshoring in 2020 to receive goods faster. Others, such as Under Armour, have been reluctant to move away from long-term relationships with strategic suppliers in Asia. Even more fear they cannot relocate scarce raw material sources.44
Still, many companies find dual supply systems to be the best approach. In a strategy known as “China Plus One,” companies move beyond sole sourcing in a single low-cost country, such as China. Electronics manufacturers, for example, plan to move 30-40% of their supply chain closer to customers.45
The European International Trade Commission has lobbied to reshore supply chains for strategic industries such as pharmaceuticals.
However, this would be a massive shift, as a substantial proportion of ingredients are produced in India and China. Can manufacturers return to the West when prices for generic drugs are lower, environmental regulations are tighter and labor unions have greater leverage?46
The world is shifting away from a China-centric supply chain, but slowly
In recent years, trade disputes between the U.S. and China prompted many large global enterprises to explore sourcing from alternative low-cost countries such as Vietnam, Bangladesh and India.47 However, moving away from China requires long-term planning, investments and leadership commitment. The total cost of the shift may not outweigh the cost of the move.
Furthermore, businesses need to assess whether moving to another low-cost country will be a safer, less risky option. GEP believes a resilient supply chain will need to incorporate sourcing and manufacturing options beside China, not instead of it.
A more flexible and resilient supply chain is, unfortunately, a more complex one
The events of 2020 might prompt some firms to trade one value type, such as cost, for another, such as speed or consistent reliability. By diversifying supply sources or distribution channels, businesses increase overall supply chain complexity.
Examples include new networks in low-cost countries, finding secondary or tertiary supply options or moving supply closer to customer locations. This trend will continue to force new decisions in 2021.
2.3 The New Essentials
Essentialism Has Been Redefined for Procurement and Supply Chain Leaders
In 2020, the pandemic pushed firms to the limit, by triggering the worst economic collapse in nearly a century.48 It also catalyzed digital transformation as firms struggled to maintain business continuity. Companies that pivoted quickly to digital were able to focus on essential drivers of short-term demand to remain competitive. In many cases, these digital options significantly improved processes, eliminated unnecessary manual and physical tasks, automated paperwork and supercharged productivity.
A 2020 TechRepublic survey found that 60% of IT leaders adjusted their digital transformation plans because of COVID-19, with 65% spending more on remote collaboration technology and 39% focusing more on IT and business process automation.49
Few enterprises avoided the shocks in their supply chains — especially where specialty components or sole supplier dependencies existed. In fact, 95% of respondents to an Institute for Supply Management survey said their supply chain was adversely affected by COVID-19 disruption.50
Many organizations simply could not easily maneuver around essential suppliers — and still can’t, even now.51
Coming to terms with “who,” “what” and “where” is “essential”
The term “essential workers” entered our lexicon to describe not only employees within health care and public safety, but also those who have to be in a physical workplace to fulfill their duties to keep society going.52
Working from home full time, however, became the essential norm for large enterprises — as 42% of the U.S. labor force now comprised remote workers.53 It caused some firms to consider if offices were essential anymore.54
“You’re on mute” is another common phrase that conveys our craving for human-to-human interactions in 2020, and is, in part, another answer to “who” is essential. Staying connected to other people is a core human need.55
In 2021, procurement and supply chain leaders should be fully armed with their own real-world use cases for defining what is essential for protecting supply lines and allowing teams to thrive.
Digital has moved beyond hype and become essential for enterprise business
Take note: The “how” is as essential as every other element.
During the early days of the pandemic, many leaders discovered that they lacked effective tools to manage their essential supply chain needs.56 They also found collaboration between internal teams and suppliers to be especially challenging, with legacy systems lacking the ability to handle immediate needs in real time.
Digital, collaborative technologies have now become must-have everyday tools of productivity and social connectivity. It’s simply how work gets done and how products are delivered to the hands of customers.
Other terms and phrases have become part of our personal lexicon: “Contactless.” “Mobile ordering.” “Curbside pickup.” Our days are filled with virtual meetings on Zoom, Microsoft Teams and other virtual platforms.
Automated, efficient digital processes are not only safer and help maintain essential physical distancing, they’re also fast and simple.
Ease of integration, ease of use. These are the hallmarks of today’s procurement and supply chain work. Flip to RFx. Flip to contract. Virtual situation — or “war” — rooms. Scenario planning. Demand forecasts and modeling that are easy to share with partner suppliers and internal teams.
Lessons from the pandemic have prepared many firms for other “never normal” situations. Digital, user-centered software has moved beyond hype and become essential.
2.4 Being Sustainable
Sustainability Is Finally a Board-Level Topic, and Sustainable Procurement Is the Key
Expectations are higher than ever for businesses to make sustainability a priority. With the rise in public pressure, activist investors and platforms that track environmental impact, corporate boards need to focus on sustainability in the short term, not just the long term.57
Sustainable procurement policies will help businesses meet sustainability goals
Procurement may manage a major part of any company’s budget, but it can also support firms’ sustainability agendas. This means making procurement decisions based not simply on economic criteria but also on the implications for society and the environment.58
By incorporating social, environmental and ethical dimensions into procurement, companies can achieve corporate social responsibility goals effectively and improve their brand image.
To achieve sustainable procurement objectives, leadership must educate and incentivize internal and external stakeholders
Procurement leaders need to define a sustainable procurement strategy and align sustainability goals with the executive team and related functions, such as finance and new product development.
In addition to training internal teams, businesses must align objectives with their supplier network to ensure that sustainable procurement practices are embedded across the value chain. They also need to update their boards and investors on the progress of sustainability initiatives.
Sustainable procurement means actively seeking suppliers with sustainable solutions rather than passively auditing incumbents
Companies are not investing enough in validating supplier declarations. Lack of visibility into supplier compliance with sustainability requirements is a risk to the business’ supply chain.
In 2021, there likely will be increased adoption of standardized industry requirements for data disclosure — such as ISO 20400:2017, ISO 26000 and The Sustainability Accounting Standards Board — and for rating agencies, such as CDP and EcoVadis, to allow businesses to make informed decisions about suppliers.
Sustainable procurement should be about working with suppliers who make sustainability a core value
Transparency will allow businesses to partner with suppliers who incorporate sustainability objectives into product/service offerings.
Suppliers can demonstrate that sustainability is a core value by using:
- Electric vehicles for delivery
- Technology that reuses scraps
- Biodegradable products and packaging
- Distribution centers that are closer to customers, for a decentralized footprint
- Renewable energy in production
With demand increasing for sustainable goods, businesses can differentiate their products from those of competitors and increase top-line growth by working with innovative suppliers.
A sustainability ecosystem allows businesses to build a competitive advantage and create longer-term value
Expanding sustainable procurement initiatives beyond immediate suppliers helps businesses:
- Reduce supply chain risk and carbon footprint
- Lower TCO through process optimization and lean manufacturing (e.g., efficient IT, circular economy models and resource efficiency)
- Increase compliance with regulations and industry standards and avoid the impact of environmental taxes
Unfortunately, many companies lack visibility into the sustainability performance of their wider supplier network. Sustainability is not always a high priority for suppliers in low-cost countries where it is unlikely to be enforced by the government or as strongly emphasized by the public. But rather than punishing suppliers who do not meet sustainability requirements, businesses can work with them to improve their processes.
2.5 Diversity Focus
Diversity and Inclusion Should Be Hardwired Into Procure-to-Pay Processes and Technologies
The Black Lives Matter movement in the U.S. has sparked a major shift that echoed worldwide — including within the global business community. Citizens and enterprises have put their time, money and efforts toward prioritizing diversity and inclusion.
Supplier diversity initiatives are no exception.59 In 2021, procurement and supply chain leaders will need to do more – by developing new approaches to include minority-owned businesses to achieve real targets for supplier diversity.60
Leaders are hardwiring supplier diversity and inclusion goals into procure-to-pay processes
Diversity and inclusion goals are generally substantial and ambitious. To truly realize these objectives, metrics need to be tracked and benchmarked at the transaction level within a P2P platform.
To begin, enterprises can focus on direct spending with small and diverse suppliers. These measurements can manifest themselves in many forms — spend by department, cost savings by negotiation and the number of events or initiatives for outreach.61
In each case, transaction-level data fuels the core metrics needed to understand diverse supplier spend. As with any business objective, unique diversity metrics must be easily discernible. Still, these metrics only get you so far, since they only measure the direct effects of spend.
To obtain a more complete picture of supplier diversity, leaders should develop processes to measure and encourage greater indirect impacts. They should examine the revenue growth within a supplier’s own supply chain and find greater induced impacts — to understand the total economic effect on the supplier’s economy and community.62
With these measures, companies can hit their own targets and match the goals of initiatives such as the Billion Dollar Roundtable. By aligning macroeconomic effects with transaction-level analysis, enterprises are more likely to see greater achievement of diversity and inclusion goals.
This is the time to invest in platforms — in executive buy-in
Supplier diversity targets can no longer be driven by middle-management. A top-down mandate that leverages metrics is essential.63
One way to accomplish this is to create diversity and inclusion councils with direct communication lines to executives. Councils should facilitate clear goals and directives that allow supplier diversity targets to be more than lip service to stakeholders.
As diversity and inclusion continue to be priorities, direct, indirect and induced impacts of supplier diversity must be ingrained within P2P platforms, supported with executive buy-in.
2.6 Cost Levers
A Post-Pandemic Strategy Requires a Post-Pandemic Cost Structure
At the start of the pandemic, companies freed up cash to compensate for sudden drops in revenue. The assumption was that most of these efforts would be reversed as conditions improved. However, facing a broader economic slowdown, leaders need to shift focus to a post-pandemic cost structure.64
The emphasis on liquidity management will move to the long-term horizon.65 Permanent optimization of working capital will ensure that organizations have sufficient cash in hand. Cash-generation actions will need to be linked to and coordinated with longer-term operational and commercial changes.
Business leaders will need to bend the SG&A expense curve as they seek a better cost structure. Cutting payroll led to record unemployment in some G7 economies,66 which can have negative downstream effects in the long run and is an ineffective way to grow profits over time.
New parameters will safeguard cash for procurement and supply chain leaders
For most firms, purchasing costs are a significant cost-reduction lever. Unfortunately, many finance organizations slashed capex budgets and discretionary spending in 2020, leading to a backlog of organizational needs in 2021.67 Sophisticated firms will turn to procurement organizations to strategically negotiate better cost positions from suppliers.
Keeping costs low necessitates better ways to manage inventory and distribution in real time. Procurement and supply chain leaders should evaluate new parameters and metrics to safeguard cash and investments.
Demand sensing based on advanced AI tools can protect working capital and cash reserves by ensuring that purchasing occurs only when there is demand and capacity.68
Match cost reduction to the contribution of suppliers toward revenue
An investment-based view allows supply chain and procurement leaders to better optimize spend. Looking at supplier costs as just an input into a budget hides the true impact, especially on indirect spend. Cost-reduction priorities should be matched to supplier contribution toward innovation and revenue.
For example, with customers worried about COVID-19, e-commerce69 and contactless pickup70 have increased as priorities for capturing sales. These efforts involve supplier collaboration with procurement, IT and commercial stakeholders. Traditionally, the suppliers would have been viewed as part of overhead or SG&A expenses, but they now contribute a great deal to enterprise strategy and are critical to increasing revenue and reducing risk.
Enterprises can create a cost structure for a post-COVID world with a sharper focus on what generates cash and a more in-depth view of ROI.
2.7 Budget and Spend
Budget-to-Pay Will Unify Finance and Procurement Under One Model
At the onset of the pandemic, CFOs and CPOs struggled to change budgets and lower costs at the same pace of economic shock. For many businesses, neither internal spend data nor external market data was available at the speed needed to make optimal decisions. This has underscored the need for a standard of finance and procurement cooperation in the budget management cycle.
In a GEP study, 46% of respondents named the lack of “No PO, No Pay” policies as the leading disruption of cash management.71 Additional studies have indicated that 12% of invoices are contested by suppliers.72
Challenges like these suggest that purchase orders and the negotiated terms associated with them are not actually applied often enough. This is frequently caused by a lack of real-time data, which for many firms is compounded by disparate sources of information.
Budgets are often challenging, and occasionally, unhelpful
At a high level, a budget prepared by a finance leader involves subtracting planned cost reductions or adding uplifts to the previous year’s cost. The data that supports these numbers, however, often comes from several sources such as actuals, accruals, open POs and pipeline documentation from procurement and business teams.
The implication is twofold.
First, finance, procurement and business unit professionals tend to operate in their own silos as they drive efficiencies.
Second, more specific details are available to the finance leaders in a non-standardized structure across business units. Finance leaders lack the tools to actively manage costs across an entire enterprise throughout the year, since there are no common, unified metrics or processes.
A new way forward for finance and procurement
Leaders must have a unified model that clearly connects budget availability with real-time spend decisions and payment finalization. Known as the budget-to-pay model, it can be aligned to turn the levels of spend on and off when global and local economic conditions require.73
When procurement sets category strategies using budget-to-pay, it is in concert with finance’s forecasting activities. And when procurement validates all year-over-year cost reductions downstream, the process is then concurrent with financial planning and analysis adjustments.
With the right technology and process redesign, finance and procurement leaders can control the valve of spend and know how to best respond to financial conditions on the ground.
2.8 Automation Shift
Substantial Procurement and Supply Chain Activities Can Now Be Automated
Tactical work has long been a candidate for automation due to the potential for improved cost efficiency, productivity and safety. From automated guided vehicles in warehouses to robotic process automation within software, the benefits are real.
The COVID-19 pandemic has accelerated the trend. In agriculture, there is a growing use of automation in irrigation, fertilizing, harvesting and breeding systems. In food processing, Tyson Foods invested over $500 million in automation in the last three years, according to The Brookings Institution.74
During a recession, automation boosts output and affords employees more time to focus on strategic work — allowing companies to do more with less. In 2021, automation will help streamline processes and allow smarter collaboration in core procurement and supply chain activities.
Businesses will accelerate strategy development in category, contract and change management to deliver results while reducing manual or duplicate efforts.
Platforms with built-in forecasting and supply network capabilities will leverage artificial intelligence (AI), machine learning (ML) and robotic process automation (RPA) to reduce their reliance on individual spreadsheets and boost shared, real-time data and demand models.
Automation, however, is not a panacea. It must be coupled with human insight into category demand and the impact of a lingering recession — and continue to manage fluctuations in safety for employees and partner suppliers.
AI models used in demand planning continue to evolve with human-in-the-loop learning
In atypical situations, though, algorithms alone can fall short. Early on in the pandemic when customers were suddenly requesting toilet paper instead of Legos, Amazon’s algorithms were perplexed.75 The situation demonstrated that bulk ordering and extreme demand surges need human intervention to revise fulfillment and inventory replenishment.
When health experts warned that the U.S. could see another widespread virus outbreak, wholesalers loaded up on extra inventory,76 while other buyers turned to alternative sources of supply.77
Looking forward, businesses that combine human adaptability with machine learning models will better withstand the shock of unforeseen disruptions. Algorithms still need a daily real-world context.
Targeted automation will become an important lever of effective procurement and accounts payable
Robotic Process Automation (RPA) delivers great value for processes that are repetitive and prone to human error. Automation in upstream and downstream procurement will empower the workforce.
For upstream procurement, requesters will have a better experience with low-touch workflows, such as automated bidding. Templatized guides and questionnaires will help employees complete tasks easier. RPA also streamlines data transferability — by receiving answers that remove the need for duplicate requests for subsequent tasks. Automatic approval workflows will keep the budget in check and the process auditable.
For downstream procurement, such as accounts payable, automation will facilitate faster payments and invoice exception handling. With a rules-based engine, invoice exceptions will be automatically routed to trained handlers. And automated Optical Character Recognition (OCR) scanning will help reduce manual invoice data entry and errors.78
The biggest benefits of accounts payable automation? Time and money. The average cost to process a single invoice falls from $12.88 to $2.56. With touchless, digital invoice processing, the average processing time goes from 11.7 to 3.1 days.
Ultimately, efforts saved means enterprises that process millions of invoices a year can take advantage of early payment discounts. This is great news for procurement and finance teams – and supplier relationships.
GEP’s automation software is transforming accounts payable from a time-consuming, manual process into a fast, touchless environment.
Procurement and supply chain leaders are entering 2021 with a lot of baggage from 2020. Though more optimistic days are ahead of us, it may be a long while until businesses, communities, schools and families feel normal or whole again.
Some leaders may find that this year is a form of personal calling. There is immense potential ahead. Decoding the right investments in a resilient, diverse and balanced business can set the stage for a bright and prosperous future. If 2020 was the pandemic shock that broke supply chains, 2021 can be the year they were rebuilt stronger than ever before.
1 “World Economic Outlook, October 2020: A Long and Difficult Ascent,” International Monetary Fund, October 2020 | https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020
2 Philipp Carlsson-Szlezak, Paul Swartz, Martin Reeves, “Why the global economy is recovering faster than expected,” Harvard Business Review, 3 November 2020 |
3 Ibid, International Monetary Fund
4 Ibid, International Monetary Fund
5 Ibid, International Monetary Fund
6 “Oil Price Charts,” OilPrice.com, 29 December 2020 | https://oilprice.com/oil-price-charts/
7 “Oil Market Report,” IEA, December 2020 | https://www.iea.org/topics/oil-market-report
8 “Monthly Oil Market Report,” OPEC, December 2020 | https://momr.opec.org/pdf-download/
9 Benoit Faucon and Summer Said, “OPEC, Allies Agree to Increase Output by 500,000 Barrels a Day in January”, The Wall Street Journal, 3 December 2020 | https://www.wsj.com/articles/opec-allies-near-agreement-for-small-production-increase-11606987819
10 Yen Nee Lee, “Central banks have ‘far less ammunition’ to save the global economy from coronavirus,” CNBC, 4 March 2020 | https://www.cnbc.com/2020/03/04/coronavirus-federal-reserve-other-central-banks-cut-interest-rates.html
11 “Global Central Banks Rates,” FXEmpire | https://www.fxempire.com/macro/interest-rates
12 Phillip Inman, “UK interest rates likely to fall below zero in 2021,” The Guardian, 17 September 2020 | https://www.theguardian.com/business/2020/sep/17/bank-of-england-keeps-interest-rates-at-01-but-warns-on-economic-outlook
13 Taylor Tepper, “Federal Reserve Outlook 2021: Managing the Covid Unwind,” Forbes, 8 December 2020 | https://www.forbes.com/advisor/investing/federal-reserve-fed-2021-outlook/
14 “Federal Interest Rate Projections for 2021,” Economics Online | https://www.economicsonline.co.uk/business_economics/federal-interest-rate-projections-for-2021.html#:~:text=The%20national%20economy%20has%20been,remain%20around%200%20to%200.25%25
15 "Short-term interest rates forecast," OECD Economic Outlook, 2020 |
16 Kevin Yao, “China c.bank to cool credit growth in 2021, avoid premature policy tightening -sources,” Reuters, 22 December 2020 | https://www.reuters.com/article/china-economy-policy-idUSL4N2J12GH
17 "Employment Outlook Survey," ManpowerGroup, December 2020 | https://www.manpowergroup.com/workforce-insights/data-driven-workforce-insights/manpowergroup-employment-outlook-survey-results
18 ”The Future of Jobs Report 2020,” World Economic Forum, October 2020 | https://www.weforum.org/reports/the-future-of-jobs-report-2020
19 Ibid, International Monetary Fund
20 "Economic Outlook," OECD, December 2020 | https://www.oecd.org/economic-outlook/
21 Tim McMahon, "What is the Current Inflation Rate?" InflationData.com, 10 December 2020 | https://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp?reloaded=true
22 "Annual inflation down to -0.3% in the euro area," Eurostat, 16 December 2020 | https://ec.europa.eu/eurostat/documents/2995521/10663702/2-16102020-AP-EN.pdf/24c495e2-62ac-8f65-9e87-47db57cf62f7
23 "Inflation forecast," OECD Economic Outlook 2020 | https://data.oecd.org/price/inflation-forecast.htm
24 Karen Gilchrist, “Salaries in Asia Pacific projected to grow the most globally in 2021,” CNBC, 19 November 2020 |
25 “Daily FX Update,” Scotiabank, 29 December 2020 | https://www.gbm.scotiabank.com/content/dam/gbm/market-insights/2020/december/daily-fx/FX-Daily-12-29.pdf
26 "US Dollar Index Futures," Investing.com, 29 December 2020 | https://in.investing.com/currencies/us-dollar-index
27 Vladimir Zernov, "What Is Expected In The Forex Market In 2021?" FXEmpire, 25 December 2020 | https://www.fxempire.com/forecasts/article/what-is-expected-in-the-forex-market-in-2021-690695
28 Jo Harper, "EU-China investment deal done and dusted," DW.com | https://www.dw.com/en/eu-china-investment-deal-done-and-dusted/a-56087516
29 Ana Swanson, “With Americans Stuck at Home, Trade With China Roars Back,” The New York Times, 14 December 2020 | https://www.nytimes.com/2020/12/14/business/economy/us-china-trade-covid.html
30 Willy C. Shih, "Global Supply Chains in a Post-Pandemic World," Harvard Business Review, October 2020 | https://hbr.org/2020/09/global-supply-chains-in-a-post-pandemic-world
31 "Biden says will not kill Phase 1 trade deal with China immediately: NYT," Reuters, 2 December 2020 | https://in.reuters.com/article/us-usa-trade-china/biden-says-will-not-kill-phase-1-trade-deal-with-china-immediately-nyt-idUSKBN28C0HV
32 Frank Tang, "China to focus on domestic consumption in 2021 as US trade war fades from priorities," South China Morning Post, 28 December 2020 | https://www.scmp.com/economy/china-economy/article/3115475/chinese-commerce-ministry-focus-domestic-consumption-2021-us
33 Shivshankar Menon, "India-China Ties: The Future Holds 'Antagonistic Cooperation', Not War", The Wire, 7 December 2020 | https://thewire.in/external-affairs/india-china-ties-expect-antagonistic-cooperation-future-not-war
34 Prakash Mirchandani, “Heath Care Supply Chains: COVID-19 Challenges and Pressing Actions,” National Insititute of Health, 5 May 2020 | https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7219430/
35 Laura Reiley and Abha Bhattarai, “Shoppers are panic-buying toilet paper. This time, there should be enough to go around.” The Washington Post, 19 November 2020 | https://www.washingtonpost.com/business/2020/11/19/grocery-rationing-supply-chain/
36 David Simchi-Levi and Edith Simchi-Levi, “We Need a Stress Test for Critical Supply Chains," Harvard Business Review, 28 April 2020 | https://hbr-org.cdn.ampproject.org/c/s/hbr.org/amp/2020/04/we-need-a-stress-test-for-critical-supply-chains
37 Daniel K. Tarullo, “Lessons From the Crisis Stress Tests," Federal Reserve Board, 26 March 2010 | https://www.federalreserve.gov/newsevents/speech/tarullo20100326a.htm
38 Karen Haywood Queen, “Ways to Effectively Address Supply-Chain Risk Laid Bare by COVID-19," SME, 2 October 2020 | https://www.sme.org/technologies/articles/2020/october/ways-to-effectively-address-supply-chain-risk-laid-bare-by-covid-19/
39 "How COVID-19 Has Transformed Consumer Spending Habits," J.P. Morgan Research, 23 November 2020 | https://www.jpmorgan.com/solutions/cib/research/covid-spending-habits
40 Are Traasdahl, “Improving Demand Forecast Accuracy During and After COVID-19," Food Logistics, 26 August 2020 | https://www.foodlogistics.com/technology/article/21138137/crisp-improving-demand-forecast-accuracy-during-and-after-covid19
41 Ben Winck, “The US economy will shrink in the 1st quarter of 2021 as winter weather spurs virus resurgence, JPMorgan says,” Business Insider, 23 November 2020 | https://www.businessinsider.com/economic-outlook-q1-contraction-coronavirus-resurgence-vaccine-fiscal-stimulus-jpm-2020-11
42 Will Green, “Move away from single production sites in low-cost countries,” Supply Management/CIPS, 23 June 2020 | https://www.cips.org/supply-management/news/2020/june/move-away-from-single-production-sites-in-low-cost-countries/
43 Ann Marie Uetz, Vanessa L. Miller, “Supply Chain Strategy Trends: COVID-19 is Prompting Executives to Reconsider Resilience,” Foley & Lardner LLP, 2 November 2020 | https://www.foley.com/en/insights/publications/2020/11/supply-chain-strategy-trends
44 Gavin van Marle, “The age of near-shoring? Too much disruption to supply chains, say shippers” The Load Star, 13 October 2020 | https://theloadstar.com/the-age-of-near-shoring-too-much-disruption-to-supply-chains-say-shippers
45 “Covid-19’s blow to world trade is a heavy one,” The Economist, 14 May 2020 | https://www.economist.com/briefing/2020/05/14/covid-19s-blow-to-world-trade-is-a-heavy-one
46 Carlo Martuscelli and Giorgio Leali, “Can the coronavirus bring back Europe’s pharmaceutical factories?” Politico, 12 October 2020 | https://www.politico.eu/article/can-the-coronavirus-bring-back-europe-pharmaceutical-factories/
47 Ibid, Supply Management/CIPS
48 “Global Economic Growth To Shrink 4.4% For 2020 IMF Predicts,” Kaiser Family Foundation, 14 October 2020 | https://www.kff.org/news-summary/global-economic-growth-to-shrink-4-4-for-2020-imf-predicts/#:~:text=The%20IMF%20estimated%20Tuesday%20that,will%20shrink%204.4%25%20for%202020
49 Melanie Wolkoff Wachsman, “Survey: 60% of respondents have altered digital transformation plans due to COVID-19,” ZDNet, 1 October 2020 | https://www.zdnet.com/article/survey-60-of-respondents-have-altered-digital-transformation-plans-due-to-covid-19/
50 “COVID-19 and Supply Chains: Increasing Impacts, Decreasing Revenues,” ISM, March 2020 | https://weareism.org/docs/White-Paper-Corona-V2.pdf
51 Thomas Y. Choi, Dale Rogers, and Bindiya Vakil, “Coronavirus Is a Wake-Up Call for Supply Chain Management,” Harvard Business Review, 27 March 2020 | https://hbr.org/2020/03/coronavirus-is-a-wake-up-call-for-supply-chain-management
52 Celine McNicholas and Margaret Poydock, “Who are essential workers? A comprehensive look at their wages, demographics, and unionization rates,” Economic Policy Institute, 19 May 2020 |
53 “Firms Expect Working from Home to Triple,” Federal Reserve Bank of Atlanta, 28 May 2020 | https://www.frbatlanta.org/blogs/macroblog/2020/05/28/firms-expect-working-from-home-to-triple
54 Uri Berliner, "Get A Comfortable Chair: Permanent Work From Home Is Coming," NPR, 22 June 2020 | https://www.npr.org/2020/06/22/870029658/get-a-comfortable-chair-permanent-work-from-home-is-coming
55 Emma Seppälä, “Social Connection Boosts Health, Even When You're Isolated,” Psychology Today, 23 March 2020 | https://www.psychologytoday.com/us/blog/feeling-it/202003/social-connection-boosts-health-even-when-youre-isolated
56 Christoph Schell, “Here's how we need to change global supply chains after COVID-19,” World Economic Forum, 30 Sept. 2020 | https://www.weforum.org/agenda/2020/09/covid-19-crisis-change-global-supply-chains/
57 Corrie Driebrusch, “The Next Wave in Shareholder Activism: Socially Responsible Investing,” The Wall Street Journal, 8 March 2020 | https://www.wsj.com/articles/the-next-wave-in-shareholder-activism-socially-responsible-investing-11582892251
58 “UN Procurement Practitioner’s Handbook,” United Nations Interagency Procurement Working Group | https://www.ungm.org/Areas/Public/pph/ch04s05.html
59 Sarah Scudder, “How Supplier Diversity Is Working in the Real World,” Future of Sourcing Digital, 10 July 2019 | https://futureofsourcing.com/how-supplier-diversity-is-working-in-the-real-world
60 Rachel Murray, “Why You Should Add Supplier Diversity to Your Inclusion Strategy,” She+ Geeks Out, 29 May 2019 | https://shegeeksout.com/why-you-should-add-supplier-diversity-to-your-inclusion-strategy/
61 “Diversity Primer,” Diversity Best Practices | https://www.diversitybestpractices.com/sites/diversitybestpractices.com/files/import/embedded/anchors/files/diversity_primer_chapter_11.pdf
62 “Economic Impact: How to Measure Your Supplier Diversity Program’s Success,” CVM Solutions | https://www.cvmsolutions.com/hubfs/CVM-EB_Economic-Impact-How-Measure-Supplier-Diversity-Program-Success-030220%20(1).pdf
63 Karmin Bailey, “Establishing Supplier Diversity,” Strategic Finance, 1 April, 2019 | https://sfmagazine.com/post-entry/april-2019-establishing-supplier-diversity/
64 Òscar Jordà, Sanjay R. Singh, and Alan M. Taylor, “The Long Economic Hangover of Pandemics,” International Monetary Fund, June 2020 | https://www.imf.org/external/pubs/ft/fandd/2020/06/long-term-economic-impact-of-pandemics-jorda.htm
65 Angelo Kourkafas, “The World After COVID-19: Long-term Economic Impacts,” Edward Jones, 1 Oct. 2020 | https://www.edwardjones.com/market-news-guidance/guidance/after-covid-19.html#:~:text=The%20crisis%20leaves%20a%20legacy%20of%20debt&text=However%2C%20the%20side%20effect%20of,highest%20in%20the%20nation's%20history.
66 Ibid, International Monetary Fund
67 Kristin Broughton, "CFOs Face Challenges Forecasting Capital Spending Plans for 2021", The Wall Street Journal, 16 Dec. 2020 | https://www.wsj.com/articles/cfos-face-challenges-forecasting-capital-spending-plans-for-2021-11608149924
68 Demand Sensing: A Critical Supply Chain Capability for the Now Economy," GEP | https://www.gep.com/white-papers/can-demand-sensing-transform-the-supply-chain
69 Fareeha Ali, “Charts: How the coronavirus is changing ecommerce,” Digital Commerce 360, 25 Aug. 2020 | https://www.digitalcommerce360.com/2020/08/25/ecommerce-during-coronavirus-pandemic-in-charts/
70 Bryan Wassel, “COVID-19 Retailing: How Contactless Operations Can Keep Shoppers and Workers Safer,” Retail Touchpoints, 2 April 2020 | https://retailtouchpoints.com/topics/fulfillment-last-mile/covid-19-retailing-how-contactless-operations-can-keep-shoppers-and-workers-safer
71 GEP LinkedIn poll, July 2020
72 Bob Cohen, “The AP Metrics that Matter in 2019,” Ardent Partners, 25 March 2019 | http://payablesplace.ardentpartners.com/2019/03/ap-metrics-matter-2019-contested-payments/
73 “The Business Case for Budget to Pay,” GEP 2020 |
74 Marcus Casey and Ember Smith, “Automation from farm to table: Technology’s impact on the food industry,” Brookings Institution, 23 Nov. 2020 | https://www.brookings.edu/blog/up-front/2020/11/23/automation-from-farm-to-table-technologys-impact-on-the-food-industry/
75 Will Douglas Heaven, “Our weird behavior during the pandemic is messing with AI models,” MIT Technology Review, 11 May 2020 | https://www.technologyreview.com/2020/05/11/1001563/covid-pandemic-broken-ai-machine-learning-amazon-retail-fraud-humans-in-the-loop/
76 Jaewon Kang and Annie Gasparro, “Grocers Build ‘Pandemic Pallets’ Ahead of Winter”, The Wall Street Journal, 27 Sept. 2020 | https://www.wsj.com/articles/grocers-stockpile-build-pandemic-pallets-ahead-of-winter-11601199000
77 Jeremy Kahn, “Hospitals are running low on the most critical supply of all: Oxygen,” Fortune, 2 April 2020 | https://fortune.com/2020/04/02/coronavirus-treatment-hospitals-oxygen-supply-shortage-covid-19-patients/?oxyujn
78 “What’s Wrong with Accounts Payable Today (And How to Fix It),” GEP, July 2020 | https://www.gep.com/white-papers/what-wrong-with-accounts-payable-today-and-how-to-fix-it