Procurement professionals are now playing an increasingly strategic role within their organizations. Procurement of raw materials and components that go into the manufacturing process is essential to ensure final product quality and strong financial performance. As supply chains become more dynamic, companies must pay closer attention to supply and supplier management. Why? Because events like trade wars, natural disasters, and supplier events, such as unexpected plant shutdowns like we are seeing with the Coronavirus outbreak, can disrupt a company’s production. And delays in direct materials can have a detrimental effect on production and revenue. Companies depend on procurement teams to mitigate the impact of those disruptions and ensure supply continuity.
The new procurement professional needs a broad set of skills
To respond to unforeseen supply or supplier disruptions, procurement professionals need to develop new capabilities. In the past, procurement was often defined as purchasing: negotiating with suppliers for better pricing and issuing purchase orders. In today’s world of complex supply networks, fluctuating input prices, and geopolitical instability, procurement’s role is increasingly viewed as strategically critical to ensuring dependable supply through supplier and supply management. The company depends on procurement to ensure their operations run smoothly through their knowledge and expertise on what they are buying, from whom, and related risk factors that could disrupt their plans.
The key to ensuring supply continuity is active management of relationships with suppliers. To prevent business disruptions, procurement professionals must carefully evaluate suppliers on capabilities such as product quality, financial stability, production capacity, and reliability—the ability to deliver on time. In addition to production-related factors, procurement professionals must determine compliance with their company’s code of conduct, including prohibiting the use of child labor, upholding fair labor practices, supporting minority and women-owned businesses, as well as sustainability initiatives and environmental standards.
Specific use case
To illustrate the points made earlier, let’s use an example of a company that produces cordless power drills: It requires plastic injection-molded parts, fasteners, hardware stampings, a printed circuit board, and a rechargeable battery. It’s a procurement professional’s job to source all of the components based on the product’s bill of materials and ensure that they arrive in time to meet the planned production run. Depending on where and from whom the components are sourced, they may also need to develop contingency plans. This may include agreements with alternate suppliers to ensure the company’s risk is minimized.
Globalization adds complexity to sourcing
Globalization of supply chains has added new levels of complexity for manufacturers. Suppliers with whom the company has a long business relationship may go out of business or may be unable to provide new, more advanced components. Alternate suppliers could be local or could potentially be on the other side of the world. This wider field creates new opportunities but also puts new pressure on procurement professionals to develop a deeper understanding across a wider potential supply base.
In a global marketplace, companies may also find themselves on the wrong end of tariffs and trade wars. For example, a component made in China that used to take 30 days to deliver now takes 50 days, or new tariffs may significantly increase the total cost of the component. If this added cost cannot be passed on to consumers, the company’s margins will suffer. Faced with a myriad of new and evolving considerations, new digital tools offer the means to help procurement professionals thrive in this evolving role.
Technology provides visibility into suppliers and materials
By using advanced technology to gain visibility into the supply chain, procurement professionals are able to identify reliable, ethical suppliers around the globe to maximize the efficiency of production and increase profitability while meeting ever-greater customer expectations for transparency and quality.
Data analytics opens up new visibilities across the supply chain, especially when it comes to tracking supplier performance. The analytics can offer insights into deep or long-term trends that more superficial monitoring might miss.
Likewise, artificial intelligence (AI) and machine learning (ML) can help procurement professionals spot problems before they emerge. AI can identify persistent or repeated delays in delivery and can generate reports on product quality. Armed with these insights, procurement professionals can identify new and alternative suppliers who can deliver quality product on time before costly problems disrupt production.
Blockchain technology is now also beginning to emerge in supply chain management. In addition to delivering simplified, secure transactions with an immutable record, blockchain gives procurement professionals confidence in the authenticity of key materials.
What are the best practices of today’s procurement professionals?
For procurement professionals hoping to embrace this new and expanded role, the best place to start is to pre-qualify suppliers before you begin doing business with them. Most companies have codes of conduct that govern how they expect suppliers to perform. Assessing suppliers on characteristics such as financial strength, capabilities, certifications (i.e., ISO standards), and ethical and sustainability practices helps ensure supplier reliability and insulate your company from disruptions.
It’s equally important to consider the company’s measured supplier performance. Are they a reliable partner? Do they consistently ship quality product? A skilled procurement professional should always keep one ear to the ground. A big earthquake is usually preceded by smaller temblors. If a supplier isn’t delivering on time, if quality issues start to emerge, these seemingly small indicators typically are signs of bigger trouble pending. By leveraging advanced technology, procurement experts can catch the warning signs and adjust their strategies—visiting the supplier, running the financials—before things take a turn for the worse.
Supply chains will only continue to grow in complexity and risk. Increasingly, they will need to take a strategic role to mitigate the impact of disruptions and ensure supply continuity. With the right tools and information, they will be able to take on that role with confidence. Digital technology that allows manufacturers to procure raw materials from suppliers anywhere in the world as easily from around the corner will thrust procurement professionals into the spotlight.
Mark Lauterbach is a former Chief Procurement Officer and Founder and Managing Partner of Mark Lauterbach & Associates, LLC, a boutique supply chain consulting firm. He has over 25 years of consulting and industry experience helping companies make their supply chains a source of competitive advantage. Mr. Lauterbach has led projects ranging from implementing tactical operational improvements to managing large multi-national transformation projects involving significant systems, data, organization, and process change. He has significant expertise in both domestic and international business, focusing his career on developing global supply chain organizations and has hired over 300 staff in the Americas, Asia, and Europe.