Over the last 30 years, Chief Procurement Officers and their enterprises operated in a relatively stable and prosperous economic environment. Unrestricted trade coupled with abundant low-cost labor and inexpensive transportation provided global sourcing teams with ample suppliers and continuous innovation — all within a peaceful, conflict-free geopolitical landscape.
That all began to change under new U.S. presidential administrations and a worldwide pandemic. The unwinding of those golden years in sourcing and procurement should give CPOs pause. What they are witnessing now and into the foreseeable future is a macroeconomic upheaval at a magnitude that should call into question everything they’ve known in the profession.
Assumptions Challenged by Shifting Macro Trends
There are many long-held assumptions by CPOs and their procurement organizations about supplier relationships, the flow of goods and services, and the supply chains that contain it all. Those assumptions are now being widely challenged or undercut as larger macro trends cause a global tectonic shift in supply chain dynamics. Procurement leaders have one choice if they want sustainable operations and a profitable bottom line — adapt to the new reality that macro-level changes are creating.
Basic truisms no longer apply, such as expecting suppliers to significantly improve their products AND deliver them at a lower cost. The days of pounding annual savings from a supplier in exchange for their latest innovation are a thing of the past. Innovation remains a cornerstone of profitability and competitiveness, but it will come at a price. The value in supplier relationships is not continual price pressure but collaboration and transparency.
Big Picture Market Forces
Understanding this new reality with a top-down reassessment of the bigger picture will signal evolving market forces and the volatility that exists. Consider these four macro-level areas that are changing how the world operates.
Inflation. When it comes to inflation, governments are raising interest rates and setting economic policies to combat its effect. For CPOs and their procurement departments, demands to increase savings rates (following severe drops) are at an all-time high — signaling a direct correlation between those demands and the high inflationary environment. Sourcing has expectations that for each product cycle, there are both innovative offerings and price reductions. That is no longer the reality.
CPOs should address inflation with speed and agility as well as decisiveness, involving cross-functional support. Ardent Partners’ founder and chief research officer, Andrew Bartolini, termed the approach as a “Rapid Response Inflation Hub” that tracks pricing, prioritizes risks, and develops/executes agile strategies — specifically internal collaboration strategies, category intelligence strategies, and advanced sourcing strategies.
Global Conflict. While supply disruptions have always existed in some form or another, today’s global conflicts are causing ripple effects that are difficult to contain. Whether it’s the Russia-Ukraine War, tensions between China and Taiwan, or escalating clashes in South America, all are impacting raw material pricing and the flow of goods across borders.
What is the answer? Know who your suppliers are in the supply chain, including second- and third-tier suppliers, to monitor potential disruptions effectively. The use of real-time monitoring solutions helps cast a wide net to ensure a proactive response to alerts. If suppliers are situated in war zones or areas of intense, long-term conflict, then reshoring or nearshoring initiatives may be required.
Supply chain risk. Supply chains are becoming more extended and complex, increasing their risk profile in the process. The COVID-19 pandemic unleashed a horde of supply disruptions upon CPOs and their teams. Manufacturing and supplier facilities ceased production, supply routes were closed for months, and the list goes on. Supply chain risk has reached unprecedented levels.
One thing became clear, without agility and flexibility, enterprises are unprotected. Understand your sourcing categories, where those suppliers are located, and potential legislation on associated raw materials prior to contract renewals. And after experiencing months of stockouts and shipment delays, the days of just-in-time inventory are replaced with just-in-case to ensure availability. Lastly, to be truly agile and flexible means having the capability to shift production from a primary facility in Asia to a secondary plant in Mexico if a disruption occurs.
Deglobalization. Supply chains were often measured competitively by their global profile, with many extending throughout all regions of the world. However, in the last several years, there’s been a movement toward greater protectionism. The Trump Administration can be viewed as a catalyst for this agenda, with U.S.-China trade tensions serving as an example. However, the Biden Administration has also introduced several pieces of legislation that are protectionist by nature. Going forward, there will be a continued push away from free trade and more nationalistic economic policies, with trade restrictions, export controls, and sanctions being the norm.
Diversifying the supply base and locating manufacturing closer to the customer base are two strategies that deserve strong consideration. Also, access to talent, capital, and competitive markets is critical for sustainable operations and innovation.
A World Reimagined
The world today is much different than 20 or 30 years ago. The core principles driving global sourcing during those days are being challenged by a host of market forces. Procurement leaders must coordinate with other business functions and suppliers ensuring that strategies in 2023 align with the context of their new reality. The time is now to rethink and reimagine your supply chain.
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