It’s been described as a perfect storm. War in Europe, extreme weather including heat waves across Europe, the drive to net zero, rising ethical expectations and the lingering effects of COVID-19 and Brexit. How should indirect procurement respond to these challenges?
There’s no shortage of challenges facing Maintenance Repair and Operations (MRO) procurement professionals in 2022. With most of these likely to linger through 2023, it’s easy to feel powerless in the face of global events.
Take inflation. Pundits argue about what more the Bank of England might have done to tame inflation at the outset, but the soaring cost of fuel has been driven by the conflict in Ukraine and ensuing sanctions on Russia.
Inflation was identified as the major challenge over the next 12 months by more than 80% of the MRO procurement people surveyed for the 2022 Indirect Procurement Report, published jointly by RS and the Chartered Institute of Procurement and Supply(CIPS).
The legacy of COVID lockdowns, Brexit and the conflict in Ukraine is evident in the results. In the UK, for example, 76% of survey respondents said the most serious challenge procurement faced was supply chain disruption, while 63% believed it to be global political uncertainty.
Separate research conducted by contract management software provider DocuCollab found that the top five procurement challenges in 2022 were: poor supply chain visibility; risk management; spend control; inaccurate data; and contract compliance.
So, is this all enough to put MRO procurement people into a tailspin? Definitely not, according to the detailed responses to the RS/CIPS survey. Despite the prevailing conditions, 57% said they were confident they could still deliver on their organisation’s Environmental, Social and Governance (ESG) targets.
Security of supply
The key to weathering the current challenges is to focus on supply chain stability, says Martin Wakelin, UK Head of Indirect Procurement at dairy company Müller. “Number one, without question, is security of supply,” he states.
“Of course, inflation is important to a business like ours, but there are supplies like chemicals to clean our production machinery without which we would not be able to manufacture anything. So security of supply falls out as number one, regardless of everything else.”
Helen Alder, Head of Knowledge & Learning Development at CIPS, agrees and says the key is what’s most important to an individual business.
“We’ve seen over COVID that there were certain supply chains just stocking out or stopping completely,” she says. “When that’s happening all over the place and in all sorts of supply chains, that’s a big problem.”
Faced with this situation, it’s vital to talk to suppliers and build relationships based on trust and openness, she says. Procurement professionals often underestimate the willingness of suppliers to innovate to meet their changing needs.
“Collaboration is a really good idea in so many ways. You should be looking at not just collaborating with individual suppliers but collaboration within your whole supply chain.”Helen Alder, Head of Knowledge & Learning Development, Chartered Institute of Procurement & Supply
“Collaboration is a really good idea,” she adds. “You should be looking at not just collaborating with individual suppliers but collaboration within your whole supply chain. A really good vendor understands your business and can add value. It’s about the added value and not just about the price paid anymore.”
Emma Botfield, Managing Director for the UK & Ireland at RS agrees: “You will never get the best out of your suppliers if you just issue an RFP,” she says. “A trusted supplier, who understands your business, should be able to offer you innovations which will help transform the efficiency and effectiveness of your procurement processes.
“It’s really important to develop a strong relationship with your key suppliers based on openness about what you are trying to achieve and what they are capable of delivering. Out of this level of transparency, innovation will almost certainly flow,” she adds.
The extent to which procurement can add value to the whole business is underscored by research from consultants McKinsey which found that companies with best-in-class procurement achieve a return to shareholders that is 42% higher than other businesses.
The consultants echo Alder’s call to get closer to suppliers.
Procurement leaders should be asking: “Do we deeply understand our suppliers’ industries and their dynamics? How are we sharing our insights with other functions to help protect revenues and margins?”
It’s all part of effective risk management, says Jim Bureau, CEO of Jaggaer, a US-based provider of cloud-based business automation technology. “In the past, risk management was more of a reactive process,” he told Procurement magazine.
“True resilience requires a 360-degree view of your supplier ecosystem. Procurement should know who their organisation is doing business with. They need to know their vulnerabilities from every possible angle – quality, value, diversity, compliance, financial health, ESG and performance.”
The MRO factor
In the current high-risk environment, the way procurement responds to challenges can make or break the whole business, says Bernhard Raschke, Chief Transformation Officer at RS Group. He says it’s essential that procurement teams actively monitor what’s happening in their markets.
“Poor data is still the number one barrier in procurement”Bernhard Raschke, Chief Transformation Officer, RS Group
Whatever industry or sector you work in, Raschke says that data is the essential ingredient – you must be able to keep track of how much is being spent by your organisation and what the money is being spent on.
“Poor data is still the number one barrier in procurement,” he says. “It’s why even good procurement people struggle to drive compliance. They just don’t have the data. They cannot track the benefits and they don’t have the early warning indicators from the market.”
Being close to where the money is being spent is vital in tough times, Raschke says.
“What I think is needed is a hybrid model, where deep category expertise is built into where the money’s being spent,” he says. “Because procurement doesn’t actually spend any money – it enables the business to spend money.”
For example, the best person to convince a marketing person to spend money more effectively is someone who has previously worked in marketing. The embedded buyers can then report into a lean central procurement function which sets the standards.
Whichever operating model you choose, McKinsey says that innovation in procurement processes and structures should be based on learnings from the current challenges.
“How are we embedding the learnings and improvements from this challenging period into our go-forward operating model?” is the question procurement teams should be asking, he says.
The 2022 RS/CIPS Indirect Procurement Report shows that operational budgets are reducing while pressure to deliver annualised savings is growing. Faced with this scenario, it would be easy to hunker down and just try to survive.
But the only effective response to today’s multiple challenges is to sharpen your risk management, get closer to your suppliers and innovate to transform the way you operate.