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This report tries to identify some of the emerging mega trends expected in the coming decade as viewed by distinguished procurement executives and Chief Procurement officers across the globe. This information would help spend organizations better plan their future strategies towards procurement.
TREND 1: TOWARDS SUSTAINABLE PROCUREMENT
Sustainable procurement seems to be gathering a lot of eye balls today. In a few years time it will rather become a necessity to run business. Sustainable and Responsible procurement will become the buzz word among the CPOs and other procurement professionals sooner or later.
Sustainable Procurement simplistically can be defined as the way a company or organization creates value for its shareholders and society by maximizing the positive and minimizing the negative impacts on social, environmental issues and stakeholders to grow revenue, reduce cost, manage risk and build intangible assets. It involves addressing the triple bottom line aspects of social, economic and environment issues.
Sustainability measures are identified at the strategic level regarding how the business wants to conduct itself in the future. Some of the arenas on which the firms could focus include
Environment (Green procurement)
Greenhouse gases emissions and carbon footprint
Using renewable raw materials
Care/welfare of ethnic minorities, children, elderly etc
Equality- gender and race
Benefitting all stakeholders : Improving public health and hygiene
Regeneration of resources
Long term growth
Fair trade practices
Economic redistribution and channelling extra investment towards developing countries
Developing more robust supply chain networks in supply markets
There are various benefits of reaching out for sustainability.
Firstly, they provide cost savings as opposed to the belief that going for green sourcing and alternative technologies for supply chain would result in increase in cost. This is true in some respects but where we go wrong is when we tend to overlook the measurement of whole life costs. Sustainable procurement strategy would enable the firm focus on whole life costing methodology when sourcing goods and services. This would include reducing use, reusing and recycling and ultimately reducing the amount of waste going into the landfill.
FIGURE 1 : Normal vs Sustainable Procurement- Cost Comparison
Secondly, they enhance corporate image in the marketplace. Engaging customers and other stakeholders can be easier through such a strategy. More importantly they prevent bad mouthing of the organization and products/services offered. Following a sustainable procurement strategy also helps in attracting good talent and improving motivation within the team.
Thirdly, they help to minimise business risk. They help to understand the societal expectations of a firm's stakeholders. Continuity of business can also be ensured by looking for resources which are renewable and don't run the risk of extinction and at the same time be a source of competitive advantage to the firm. They would also enable the organization to comply with the laws of the land. Increasingly countries are getting more conscious towards social and environmental issues and developing stricter legislations.
FIGURE 2: Resource constraints to force look out for newer, cleaner and greener sources of
Fourthly, they can help create markets for new products and services, by using technology to develop and market sustainable products that will initially attract consumers who are early adopters and command a premium price in the marketplace. They also reduce waste and improve resource efficiency.
Procurement needs to buck up for the newly adopted strategies. The major hindrance in adopting the practice may come due to costing fears. However, as demand for greener products will pick up, the effects of economies of scale would start reducing the costs. Furthermore, whole life cycle costs do provide significant savings in some cases. To allay the fears even further, some other strategies may be employed.
Minimising the need to purchase - avoiding the need to purchase is the most direct way to cut procurement costs and achieve environmental savings.
Joint procurement - Combining the procurement actions of several authorities can help to achieve significant savings through increasing your buying power, and at the same time is a useful way to introduce sustainable procurement into a cautious organisation.
Price ceilings - When an estimation of life-cycle costs is not possible for a specific product and/or the green alternatives are more expensive, award criteria can be used to limit the price increase to a maximum value - a price ceiling. It involves using environmental or social aspects as an award/evaluation criteria rather than a specification (minimum standard). If weighted appropriately, this will ensure that prices cannot rise significantly.
FIGURE 3: Price Ceilings
TREND 2: EMPHASIS ON SUPPLIER RISK MANAGEMENT
In the coming years, procurement will become managers of risk and complexity. As we begin to collaborate more closely within our organizations and with our supply base, the level of risk and responsibility that procurement must take on inevitably increases. Some of the reasons for such a trend are illustrated below
With enhanced levels of backward integration, there will be an increased dependence on external suppliers.
Volatility in macro economic conditions lending volatility in raw material and energy prices also deepen the need for analysing the supplier risk. This is particularly concerning for the chemical industry where the threat of enhanced costs and reduced availability is ever haunting.
With over reliance on individual vendors through maintenance of long term relationship, it opens up a gateway for heightened risks through shortage of key raw materials.
Currency imbalances and global financial crisis also create uncertainty with respects to maintenance of sound health of the supplier. No longer would an organization get enough time to identify, evaluate and react to a situation. Good financial health of the supplier is absolutely essential for continued supply and sustained growth.
Failure to correctly ascertain the supplier risk may result in heightened costs, loss of revenues or sales and loss of reputation or adverse publicity.
Supplier Risk Management basically involves measurement of three important parameters. These include financial performance, ethical performance and operational performance of the supplier concerned. Financial performance may involve measurement of incremental cash flows of the supplier. This will indicate the current financial health of the supplier. Other contributing factors, such as supplier status as liquidating or going concern, will identify whether the supplier can be roped in for long term relationship. External factors like interest rates and foreign exchange rates also play an important role in the overall financial performance of the supplier. Suppliers will need to be gauged for their ethical performance in terms of environment, following the code of conduct and maintaining proper working hours/ labour conditions. These aspects would generate greater importance as both the supplier and buyer would no longer be two distinct entities and their actions would equally reflect upon the other. The third factor i.e. operational performance assumes the same importance as it assumes today in terms of delivery performance, product defect ratio etc.
Leveraging information technology to decipher information after analyzing vast amount of data, which is increasingly being available, would be critical.
TREND 3: DIVERSIFICATION AND PERSONALIZATION
Customer demands are ever evolving. In lieu of high competition, complete information flow and market transparency, the customer would become omnipotent. The products would need to be customized /personalized to suit his/her needs and wants. Greater buying power would also mean that cost leadership can no longer be the differentiating strategy to win customers. Even though cost would be important, complete personalization of goods and services holds the key to success. Thus, the total SKU counts and product variants will increase and procurement will need to adjust to the change and appropriately add value.
Another noteworthy development would be that the growth will come primarily from new international customers and/or products that are customized to meet customer needs. So the complexity of supply chains would grow significantly if the firms have to reach out to these customers.
Additionally, even though the number and locations of customers are expected to increase, the total number of manufacturing locations will decrease owing to outsourcing and the number of suppliers the firms would be working with in future. Easy to describe and most of the transactional activities specifically which are repetitive would be outsourced. Only the critical strategic procurement activities which lead to core competence and contribute to business acumen would stay. Some of the activities which should be outsourced include
All transactions processing including POs, invoices and payments
All non-critical/non-strategic spend category management including supplier catalog, contract management and sourcing event execution
Most data gathering, structuring, storing, analysis and reporting activities, be they for spend analysis, external market intelligence, risk intelligence, supplier performance management and so forth.
Implications of Outsourcing
Economies of Scale: Aggregation of multiple orders reduces costs.
Demand uncertainty would be shifted to the suppliers who themselves reduce uncertainty through risk-pooling effect.
Buyer can focus on core competency and take a more focussed approach for procurement by engaging suppliers only on those activities which lead to core competence.
Outsourcing would provide greater flexibility for the firm under conditions of volatility in consumer demand which would be seen more so-often in the days to come.
The threat of loss of competitive knowledge to suppliers to open up competition which currently limits outsourcing would no longer be an issue as the firms would have clearly defined which activities lead to their core competencies and as discussed earlier, they would outsource only non-strategic and non-critical activities.
However, corporate culture and behaviour is also very essential for outsourcing benefits. Autocratic organizations will never be particularly good at managing or deriving benefits from outsourcing relationships, which need to be driven and valued on the basis of outcomes.
TREND 4: SUPPLIER VALUE MANAGEMENT GAINING MILEAGE
Procurement will shift its focus from short term cost cutting to long term value creation. This would be made possible by two important developments i.e. through innovation driven procurement and long term relationships based on value with key suppliers. This will help to drive deeper savings throughout the supply chain allowing for top line growth and continued bottom line reduction.
Shorter product life cycles and increasing commoditization would mean that the firms always have to stay affront as far as innovation is concerned to create competitive advantage and drive value. So, backward integration focussing on innovation will become increasingly important. Firms would expect a greater percentage of what they create, from outside companies. An important role for supply management pros will be to segment and formalize innovation relationships in ways that protect intellectual property, manage risk, and ensure the competitive advantage flowing from customer-supplier innovation always stays with the parties who drive it. Suppliers help to innovate to ease market entry and sales.
Firms would also be willing to work more with its business partners to increase their variable costs over its fixed, thereby trying to reduce its overall risks. Different business models will be developed to integrate business partners within the organization
Collaboration would prevail addressing a win-win situation for the parties concerned rather than just the data sharing which happens right now. This will help create an extended enterprise. Long term contracts would exist. A transition from 'buyers and suppliers' to 'integrated supplier networks' will enable greater coordination of innovation roadmaps across connected businesses and industries. Firms would need to work with their suppliers to decide together where they want to reach in the next 10 years. They will collaborate simultaneously to develop, to prepare, and go to market with the exact same strategies. It will require a complete transformation of procurement organization. It means establishing highly skilled technical entities that can be embedded with engineering. It forces companies to open their books and their patents to suppliers who could be supplying their competition as well, so understandably, will be a very difficult thing to accomplish.
Additionally, benefits from such collaborations can only be successful if the firm is willing to take greater risks in commercial relationships with critical suppliers by leaving out all the classic kinds of legal protections that can de-motivate suppliers. One such de-motivator is the 30-day escape clause that allows for closure of contract with a 30-day notice period. With such de-motivators a supplier would never feel confident or interested about investing in people, talent and innovative thinking. With every critical supplier the firm works with, it has to make sure that it is brought into their success and suppliers are brought into its success. The firm should be willing to show that, if the suppliers are going to invest millions of dollars or thousands of hours and lay open their core competencies to the firm, it is going to be a win-win scenario.
Another development may see firms incorporating both risks and gains in their commercial relationships with their suppliers. This would build trust in the relationship. However, the challenge would be how to identify how much of the firm's success is due to its own brilliance and how much is due to a supplier coming into the process.
One more emerging trend is the evolution of end-to-end supplier networks and solutions replacing products that drive value. Suppliers would engage in "total solution" type relationships whether it is an OEM or a third party distribution partner. This would involve optimising productivity, reducing total costs by taking an overall 360 degree approach and developing and implementing best practices within the customer organization. However, finding these creative solutions relies on developing new models for buyer-seller relationships and for creating direct connections between solution providers and internal stakeholders.
The success of all collaborative relationships with suppliers would require the suppliers to recognize the firm as the most desirable customer. This is because as opposed to the present, even if the supplier partners with two or three players in the same industry, there would be no competitive advantage. So trend will move towards driving exclusive supplier relationships. This would also require the firms to move from the current confrontation strategy to a single networked entity where the firm dominates while being liked by its subjects as well.
TREND 5: RISING GLOBAL TENSIONS LEADING TO SUPPLY CHAIN RISKS
The emerging global economic situations are a source of worry for sourcing in the future. Persistent insecurities plaguing geographies in which procurement will function will lead to supply chain risks. Short-term factors will increase pressure to develop contingency plans for managing risks associated with extended supply chains and over-reliance on single suppliers. The risks may either country specific risks or may affect the entire global economy as a whole. Country specific risks mainly entail political and economic stability of the country concerned.
Last year we had seen major political shakeups in Middle East and North Africa. The political success of the Tunisian revolution set a dangerous precedent for authoritarian regimes in MENA, with Egypt following a similar path. However, such regional instabilities caused serious difficulties in sourcing of raw materials from these countries. The price of the raw materials also goes uphill. Below shown is the trend of oil prices following Libyan revolution.
FIGURE 4: Oil price trends following Libyan political situation
Such political instabilities will lead to the markets re-pricing the risks in the emerging markets as a whole and the emerging markets will no longer be able to enjoy the unrealistically low political risk premiums. This would mean the price of raising debt for these regional economies would increase. So, overall country attractiveness may be affected both as a market as well as a sourcing centre.
Economic stability of countries has also been under pressure lately as the side-effects of a truly globalized world has started showing. The current economies are highly integrated and will be more so in the coming decade. The commodity prices take an upward trend owing to volatile global economic conditions. Smaller economies would increasingly find it difficult to curb inflation and we can see greater instances of hyperinflation with governments succumbing to economic pressures coupled with pressures to drive growth.
Other risks include unforeseen risks like natural disasters (tsunami's, earthquakes), piracy, cyber attacks and terrorism. World 2020 would see persistent insecurity to business caused by these factors. For example after the destruction caused by tsunami in Japan, Toyota's North American plants have had to scale back their working hours in order to conserve supplies of parts that are sourced from Japan. Some shipping companies have also refused to enter the Japanese coast because of fear of radiation.
FIGURE 5: EFFECT OF NATURAL DISASTERS
Piracy is also on the increase with International maritime Forces having limited success in the Gulf of Aden. As a result of these attacks, shipping companies are facing increased insurance and security costs, which have to be passed on to customers in some form. Such phenomenon is expected to rise in future and spread to other areas as well causing procurement hurdles.
FIGURE 6: PIRACY ON THE INCREASE
Already data holds the key for measuring performance and driving strategy. Data tells us what already happened, how many defects we had in the last month, how many shipments were late, and how much savings we achieved (or did not achieve). In the future, it would go one step ahead and procurement will focus more on forward-looking, predictive analysis. Depth and value of predictive information being exchanged among trading partners will grow in the coming decade as participation in networked business communities expands exponentially. As predictive information would concern the future strategies of the firm and the supplier, the confidentiality of the information available will be higher and the threat of cyber crime will increase. One needs to guard against cyber threats to protect its competitive advantage.
TREND 6: TOTAL AUTOMATION OF PROCUREMENT PROCESS
Going forward information technology would be a key enabler. As discussed earlier data would predict the future through forward looking predictive analysis. Online sophisticated models would be built that project from the data where supplier defects are most likely to occur, measure KPI for suppliers, prioritize supplier performance according to customer requirements etc.
Cloud based systems will entirely transform how procurement is carried out. The cloud will force price transparency. Procurement tools will become so intuitive by 2020 that even untrained professionals can be guided through the processes of executing successful. Savings will be tied to things like discounts and rebates for reaching certain volumes or paying early. Entire process will be automated with predefined negotiation strategies in which orders would be based on minimum-maximum levels. This will happen because companies would increasingly realize that speed-to-market, exclusivity, innovation, and gain-sharing in supplier relationships create value proposition rather than cost savings through negotiation, which consumes the maximum effort at present. Sourcing costs would be determined by marketplace.
The ultimate result would be shift of human resource requirement from procurement experts to people who can take the available information and develop proactive strategies that advance the business segments' priorities instead of waiting for the business segments to come looking for help with particular problems or ideas that have already been formulated.
TREND 7: SHRINKAGE OF SPEND MANAGEMENT
By the next decade, firms would be focussing entirely on profits rather than just cost savings. Procurement goals will become similar to marketing and operations goals where it is not just about cost savings but, rather, about how supply management helps marketing drive customer acceptance or helps operations drive profitability. Competitive advantage won't be driven based on cost competitiveness even though cost control would be taken as given. Rather it would revolve around things like innovation, collaboration, internal and external stakeholder satisfaction. Most procurement organizations will be working on top-line growth and product innovation as well as bottom-line impact and total cost of ownership. Accountability of costs relate to how they lead to higher revenues. This would enable the firm to collaborate with the suppliers and develop innovative solutions.
Resource optimization would become the forefront agenda rather than resource usage. Customer engagement would become core to the business as it would be an era of customization and personalization marked by high competition.
Another development foreseen is the disappearance of functional procurement. Procurement would rather embed into the business processes. New spend management professionals get involved only where they are needed and move on once the right supplier relationships, processes, information flows, KPIs and performance metrics, technology tools, and so forth are in place and running both smoothly and predictably.
However this would require clearly articulated business policy and strategy and the disciplines of procurement should become a routine part of the way the business operates
TREND 8: RISE OF ASIA AS AN INNOVATION HUB
Asia, more specifically India and China, has long been considered as a low cost centres for production and sourcing purposes. However, in the coming years these countries will mature enough to carry the mantle of innovation on their shoulders. There are various reasons why such a trend may come up.
Innovations often emerge from existing technologies. These countries provide a diverse context in which the technologies are used, hence provide a foundation for previously undreamed of- permutations and combinations.
The self-interest of Asia's considerable commercial entities will compel them to engage vast low-income populations in serious commerce.
Vast and ready markets available to test out the products. Improving the time to market.
Asia's late industrialization implies it will be less locked into old infrastructure and legacy technologies and would be more willing to adopt new ones.
Vast amounts of human energy available.
Declining R&D productivity and increasing development costs in Western countries.
Significant government efforts has been visible in many Asian countries specially China to utilize such favourable conditions to build up its competitive advantage. Regulatory harmonization is expected with government lending support by giving incentives for funding innovation.
Such a trend would lead to expats willing to return to their country. Reverse brain drain has started and would be even more pronounced by 2020. China and India would see a great influx of talent and expertise. It would also mean that firms would vie for a mixture of collaborative research, contract research, outsourcing and co-development.
TREND 9: MIDDLE LEADING/CPO ROLE DIMINISHING
The regime of an omnipotent CPO would end by 2020. The middle management would enjoy an increased strategic role with primary responsibilities being-
Satisfying business needs in delivery time and quality
Managing outsourcing and delivery of contracts
Managing and improving the purchase system
CPO would also shed his responsibilities due to standardization of procedures brought about by automation and collaboration. A possible outcome to automation is deployment of spend management professionals in strategic roles and in areas which at present came under the purview of CPO responsibilities. Moreover, strategy formulation is also carried out in collaboration with the suppliers. It is the supply base which will carry out innovation and the firms may leverage their R&D capabilities, thereby onus being shared with the suppliers.
TREND 10: HUMAN RESOURCE PROCUREMENT
As discussed earlier, procurement function in 2020 would require individuals who can add value to the organization strategically rather than being a procurement specialist or a number cruncher. Greater supplier facing positions will be created at high levels in the strategic lines of business that comprise a corporate enterprise. They will be responsible for developing - with suppliers in mind - all the strategies that help the business organize, design and execute processes, outsource (or in-source), assure supply, innovate, and manage costs. People staffing these new supplier-facing positions may have web-like linkages to core enterprise spend management organizations, their interests, activities, and allegiances will be heavily oriented to driving success at the business line level.
The firms would leverage human capital of suppliers through extensive collaborations. Buyer supplier lines would blur. So the spend management pros would look to extract more value from suppliers in 2020. They would look to leverage supplier resources and integrating supplier functions 1-to-1 with their own. Some of these resources might actually be larger than the firm's own resources or might be smaller but they may have expertise in certain areas or methods that the firm can tap into.
Overall the firm's human resource deployed would be smaller and would have specific characteristic requirements like those mentioned below.
Strategic development of cost management
Business relationship management
Developing and delivering term plans
Influencing behaviour of people
Analytical skills for predictive capability