Over the past several decades, procurement has been a race to the bottom dollar. Where, and from whom, is the cheapest of the cheap available? Which suppliers can be beaten down the farthest? These are the legacy motivations of procurement, and to be fair, they’ve contributed to a level of profit, affluence, and convenience around the world that previous generations would have thought impossible.
But the race to the bottom has been called off in 2020. Because of the pandemic, getting the best-priced resources suddenly became secondary to getting resources at all. When the initial outbreak of COVID-19 occurred in Wuhan, China, it affected millions of businesses around the world (including most Fortune 1000 companies) that had tier one, two, or three suppliers in the area. The result was a huge shock to global supply and demand in virtually every industry, and ultimately, the closure of hundreds of thousands of small businesses.
There’s not an end in sight to the disruption that the pandemic continues to cause, but that doesn’t mean that priorities can’t evolve in the meantime. The challenge, of course, is for businesses to figure out how to strengthen supply chains without ceding ground to competitors – a task that’s even more difficult during a recession.
What are the new priorities, and how can supply chains embody them?
One of the biggest vulnerabilities exposed by this year’s massive disruptions is reliance on a single source for a particular product or resource. Yes, there are instances in which no other options exist, but typically, the single-supplier model is used to maximize margins and streamline business processes. As many companies unfortunately realized too late, those benefits go out the window when supply itself becomes unavailable.
Because diversification can be a minefield, it’s wise to approach it strategically. You should start with risk assessment, according to Gartner, then look carefully at your existing partnerships, figure out what you most want to protect, and decide what compromises are worth making.
Historically, if you were getting your company supplied at a price that allowed for a good margin, then you were doing your job. Procurement isn’t so simple anymore, and the pandemic has driven that point home with a vengeance. To ensure continuity and resilience, businesses need to have a bird’s-eye view of their entire supply chain, all the way down to the transportation networks that underpin the markets of lower-tier suppliers.
Even if your business somehow escaped the worst of 2020 so far, the pandemic isn’t over yet, and new challenges will be coming down the pike. The mapping process may be straightforward, but it isn’t necessarily easy or cheap, so the first step is convincing leadership in your organization that it will be much more affordable than falling victim to the next major disruption.
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Procurement has traditionally been a purposely opaque area of business. Transparency, says conventional wisdom, strips away competitive advantage and doesn’t result in short-term ROI. So why lean into it? The biggest reason is that it’s what consumers want. Consider Patagonia, which reached a $1 billion valuation in 2018 as one of the few companies with a radically transparent supply chain.
The trend toward transparency has been happening for years, but the pandemic has amplified its importance. Previously, transparency was an innovative marketing strategy and a clever move for procurement. Now, with consumers’ wallets thinning but their awareness brimming, a lack of it represents a serious disadvantage.
Digitization, automation, and the synergy of emerging technologies have already laid the groundwork for a much different procurement landscape in years to come, and the pandemic has given us even more to consider. The bottom line is that we are in uncharted waters, and it would be a mistake for managers to think that they can just weather the storm. Instead, they should be actively plotting a course toward these new priorities.