Elevated levels of uncertainty and turbulence are changing how we manage risk, say senior indirect procurement professionals

“To say we live in challenging times would be an understatement,” wrote Emma Botfield, Managing Director for UK & Ireland at RS, in the introduction to the 2022 Indirect Procurement Report produced by RS and the Chartered Institute of Procurement and Supply. “Inflation rates are rising, supply chains remain under extreme stress, and fuel and raw material costs are surging.”

These challenges, and the heightened sense of risk they generate, were a key theme throughout a roundtable discussion featuring senior indirect procurement professionals held at RS Group headquarters at the end of 2022 in London. How do those who manage Maintenance, Repair and Operations (MRO) negotiate these risks and what impact does this have on indirect procurement?

This article, which considers the response of discussion participants to these questions, is the last in a series reflecting on the roundtable event and exploring key concerns for those responsible for MRO: how best to manage demand, navigate change and mitigate risk.

Like the roundtable itself, these articles are also informed by the results of a global survey of indirect procurement professionals conducted by RS and CIPS. The 2022 Indirect Procurement Report, entitled Taking control as the pressure rises, offers further analysis of the survey’s findings.

The impact of aggregated risk
According to the 2022 Indirect Procurement Report, the biggest procurement challenges are inflation and higher costs (82%), supply chain disruption (76%), managing risk in the supply chain (63%), global political uncertainty (also 63%) and recovery from COVID-19 (33%).

These five challenges create a cumulative sense of risk within MRO – and this has a knock-on effect. “The pandemic, Brexit, Ukraine, potentially other factors like the situation in China taking effect,” said a procurement lead working in the defence industry, “It’s not risk, it’s aggregated risk.”

Dealing with the effects, or potential effects, of these risks can hinder plans for developing indirect procurement. “It’s not that we can’t manage that risk, but it’s a limiting factor,” continued the defence sector procurement lead. “It stops us implementing the bigger, more creative solutions because all the risk mitigation just nails you to the floor.”

Within their organisation, for example, “We are desperately trying to mature the procurement function and reshape ourselves after a reorganisation and that takes a huge amount of effort and focus, but you’re always going to get pulled into this risk management.”

“As long as you’re in firefighting mode it’s very difficult to think strategically”

“As long as you’re in firefighting mode it’s very difficult to think strategically,” observed another participant.

Aggregated risk not only takes up large amounts of time and attention, but it can also encourage caution to a point that impedes innovation and development within MRO. “We’re used to managing risk in the market,” said the attendee from the defence industry, “but it’s what that aggregated risk does to your internal risk appetite that I worry about the most and will probably have to wrestle with the most in the next 12 months.”

Other participants were more optimistic about the opportunities in the coming year. “I agree,” began one, “but I hope we are emerging and able to think more strategically and start to focus on opportunities such as digital transformation and sustainability.”

They added a note of reservation, though. “Certainly, everything on the report’s list of procurement challenges is still a watchpoint,” they continued, “and if there is another global event, we need to keep our eye on market conditions and be prepared to react if required. It does feel now like this is the new normal.”

Changing attitudes to inventory
Other participants reflected on how risk shapes procurement policies. “We can end up looking at where the screw was built, where the metal came from that was in the screw and how the screw was shipped,” noted a category manager in the infrastructure sector, but this may not be the most effective approach.

“Sometimes there seems to be a desire to find a strategic solution to a tactical issue. If you’ve got to have it, if you can’t do without it, then you need a procurement strategy that says you need to have the stock – and how long you need to have stock for and how much you want to invest in the stock.”

“What’s your appetite for risk? None? Get some stock”

Again, this comes down to what decision makers deem to be an appropriate amount of caution. “What’s your appetite for risk? None? Get some stock,” said one attendee. “If you need it and you can’t guarantee supply, stock it.”

A procurement manager at a national infrastructure company has adopted the same tactic. “We can’t manage all those risks and we can’t invest the resource to predict the unpredictable, so I’m asking my team to go back to basics,” they said. “If you can’t do without it, stock it.”

However, participants also discussed the downsides of trying to reduce risk by holding stock. “It just ends up being an operational, reactive kind of approach,” lamented a category manager. “It’s not a strategic approach to managing your costs, supply chain risk and disruption.”

The utilisation of trusted suppliers
“Stock does represent an investment,” said Botfield, “but are these parts you have to hold yourself or can you get suppliers involved to help you keep inventory on hand? This is something trusted suppliers can partner with you on.”

“Yes,” responded the global MRO category manager. “We’re not a distribution business yet we have a significant amount of  working capital tied up in inventory. So, we’re finding suppliers that can start to take that stock back and hold it onsite near to our locations to deliver just-in-time when we need it.”

The figures cited in the 2022 Indirect Procurement Report indicate that other businesses are thinking along similar lines. Two of the top three key performance indicators (KPIs) that organisations set to measure supplier performance, for example, focus on quick and easy access to products: delivery (63%) and availability (49%).

These KPIs help to build trust, which is essential if this approach is to work effectively. “We have done a bit of this,” said one attendee, “But if you say an item is with the supplier, can you check with them how much they have and when the next one is coming in?”

“And it’s the trust that they won’t sell it for triple when you really need it, isn’t it?” added another participant. “It’s back to the same issue: it’ll cost you.”

It appears, however, that more organisations are moving in this direction. “We’re currently evaluating alternate contracting systems,” said one. “We’ve consciously made a business decision that we want to control those stocks and manage those stores with supplier support,” said another – and they are not alone. According to the RS and CIPS survey, 13% of organisations now outsource store management.

This has many advantages, as does an attitude of trying what works then responding accordingly. “You can go to zero inventory as long as you have a dependable supplier who’s down the road and will deliver in two days,” said the global category manager from the energy sector. “If they cannot deliver in two days, say this isn’t working and put it back on the inventory.”

For more insights from experienced indirect procurement professionals on the challenges of MRO today, check out the first article in this series, “How do you manage demand within indirect procurement?”