Planning and spend analysis
From a process perspective, planning and spend analysis encompasses data collection and verification, data cleansing and classification, transaction analysis, and the identification and prioritisation of opportunities.
From a resilience perspective, optimising these processes requires the presence of a risk management mindset from the very beginning. This, in turn, necessitates a comprehensive understanding of critical suppliers:
- Who are they?
- Where are they located?
- Are they single-source providers or do multiple providers deliver similar goods or materials?
- What contingency plans need to be in place for each critical supplier?
Answering these questions often requires procurement to create and sustain visibility into fourth-party suppliers.
In addition to contingency plans, procurement teams should consider creating dual-sourcing arrangements or diversified geographical options to strengthen resilience; these two approaches should operate in concert. For example, if a supplier in Asia provides 70% of the materials needed for production and an onshore supplier handles the remaining 30%, what mechanisms help to adjust that ratio up or down quickly when a disruption strikes? This planning also should consider how fluctuations in other industries affect crucial third- and fourth-party suppliers. Procurement groups in an oil and gas company, for example, should recognise that a federal infrastructure spending bill may inflate the price of steel needed to build offshore rigs. This type of awareness is typically driven by having robust category management capabilities.
Spend analysis should be anchored in knowing where spend is today down to a procurement category and subcategory level (not GL level); this enables procurement groups to embed contingencies into their plans in terms that are not oriented to just how a company tracks expenses and reports financials.
Sourcing and category management
Sourcing and category management activities include forecasting and planning (i.e., supply planning), strategy development, sourcing strategy execution, supplier evaluation and selection, and category analysis.
Effective sourcing and supplier selection activities require clarity. Procurement leaders should have a firm grasp of inherent and residual risk while conducting sufficient supplier due diligence. This scrutiny should apply to each supplier’s complete capabilities, extending well beyond the provision of a good or service to other proficiencies, including:
- How suppliers manage their resilience
- How suppliers manage their subcontractors and suppliers (i.e., nth parties to the purchasing company)
- How suppliers proactively monitor, identify and respond to supply chain issues and other risks
The output of this risk assessment and other due diligence should be used to develop supplier segmentation. This tiering ultimately informs what needs to be included in the contract and dictates the frequency, depth and level of rigor that should be applied in the ongoing monitoring of that supplier.
Category management represents a procurement lifecycle process without clear starts and stops. A resilience centered category management approach is not linear in nature. Instead, it continually evolves and should be recalibrated in the pursuit of continuous improvement.
A modern category management methodology:
- Prioritises categories based on multiple criteria, such as criticality to the business and level of spend
- Identifies the category team and establishes a charter
- Analyses spend and demand trends that seed the development of a TCO model
- Develops and refines hypotheses concerning opportunities for resilience and efficiency improvements
- Evaluates operational and process levers as well as external levers
- Continually refines the category strategy
- Develops category-specific pricing models and requests for proposal
Processes within the contract management phase of a resilient S2P lifecycle include contract request, authoring, negotiation, execution, post-award contract administration (including change orders and amendments), reporting and analysis, and the development and upkeep of templates by contract type and a clause library.
Creating and sustaining visibility is the ultimate objective of a leading contract management capability. Procurement teams need visibility into contractual terms and clauses to ensure they are not caught flat footed when required to pivot in response to internal and/or external changes and challenges. They should ask question such as:
- What functions, business units, locations and products are impacted by a contract? How do issues with fourth parties/subcontractors impact this contract?
- Do we have volume commitments or other performance obligations? What are the implications of canceling a contract or PO?
- What notification requirements exist?
- What level of contractual exposure exists with a contract (e.g., indemnity, liability, warranties) for a contract breach?
Visibility also enables procurement groups to prepare in advance of looming sourcing events and renewals. This foresight strengthens their decision-making and negotiating hands.
In this area, as in others, resilience is a function of speed. Procurement teams that can address these questions in near-real time tend to have mature processes in place, and these processes are supported by advanced automation and data analytics. Leading procurement groups also forge highly collaborative relationships with their legal teams. These collaborations help ensure that clauses designed to support supply chain resilience (and, therefore, organisational resilience) are incorporated into master agreements and individual order forms.
Purchasing and Accounts Payable
There are several critical processes within Procure to Pay. Two key areas where Procurement and AP can focus their efforts for improvement are increasing spend on POs and improving working capital.
The first focal point concerns PO and non-PO buying. Procurement groups can sharpen their visibility into payment obligations and supplier selection by increasing the portion of purchases covered by POs. A PO signifies that a predetermined amount of money has been approved to pay a supplier, the need is valid and the supplier is the preferred supplier. It provides leadership visibility of commitments and serves as a clear communication mechanism to suppliers around what is needed and when. In these cases, the execution of the payment can occur quickly and smoothly on the back end, in accordance with preapproved payment terms and, in many cases, automatically. Non-PO purchases usually require approval on the back end, which can create uncertainty concerning payment obligations and can extend approval time, which could lead to late payments to the suppliers.
The second area involves improving working capital management. From a resilience perspective, procurement groups need to take a more holistic, supplier/category specific view of payment adjustments to improve cash flow. This means considering the impact on the organisation’s cash flow as well as the financial impacts on suppliers of all sizes. The vast majority of buyers may want to quickly extend payment terms from 30 days to 60 or 90 days when a need arises to increase cash flow. While that adjustment may succeed from an internal working capital management perspective, it also can trigger unintended consequences. A smaller, more specialised supplier may not have the ability to wait 90 days until settlement. If that specialised supplier’s product is critical to the organisation, the procurement team should consider other options for increasing cash flow. A growing number of these options are available, including discounts for early payments, receivables factoring and other supply chain finance mechanisms. Applying a strategic and holistic approach can increase working capital without jeopardising critical goods or services to an organisation.
Supplier management activities include the following interrelated processes: supplier enablement and onboarding, supplier performance management, supplier risk management, and supplier relationship management.
These activities require procurement teams to apply a combination of art and science. To manage supplier performance, procurement applies both objective and subjective evaluation criteria. In heavily regulated industries, certain objective performance requirements are mandated by regulatory requirements. It is crucial for procurement teams to incorporate resilience considerations into all supplier management processes while ensuring that monitoring is conducted on a continual basis. Red flags should be raised when risks and potential issues arise, as opposed to after the fact.
Supplier, or vendor, scorecards can help manage supplier performance. The scorecards should be broad and balanced. Balanced performance criteria extend beyond operational performance to all the factors that are important to the purchasing organisation, such as contract compliance, ongoing monitoring of financial performance, changes in management, monitoring of reputational risk (e.g., negative news about the suppliers), information security and data privacy, and more.
In addition to managing supplier risk and performance, having a supplier relationship management (SRM) programme is a key enabler to driving improved business outcomes. Furthermore, as proven by companies that most successfully navigated the pandemic waters, a SRM programme can be a critical aspect of creating resilience in the supplier base through collaboration with strategic vendors. Beyond managing suppliers to agreed commercial terms, SRM moves away from traditional transactional arrangements to a holistic view of collaborative supplier relationships. This approach can lead to incremental savings, innovation and continuous improvement, joint process improvement, and improved communication and collaboration with key suppliers.
Third-party risk management (TPRM) marks another component of supplier management, one that may apply to traditional suppliers as well as other vendors — and their suppliers (e.g., nth parties). An effective TPRM capability extends from initial due diligence on potential vendors to contract management, onboarding and ongoing risk, and continuous performance monitoring. Due diligence and upfront risk assessments produce data and insights that should inform and shape contracting and performance-monitoring activities.
In closing: visibility, speed and accuracy drive resilience
While redesigning a procurement capability to support supply chain resilience is a comprehensive undertaking, execution is straightforward in most organisations. Risks and opportunities related to improving resilience should be identified. New processes and activities with resilience baked into them are then designed, enabled, monitored and adjusted as needed.
As boards, executive teams and procurement leaders consider how to update the S2P lifecycle, they also should keep in mind that:
- Procurement resides at the center of supply chain risk management: Boards are discussing supply chain redesigns and risk management because redesigns of these capabilities are rightly viewed as a key driver of business agility and resilience. Supply chain resilience is achieved through the combination of purposeful planning and functional excellence, and is supported by core capabilities, including procurement.
- Resilience and efficiency are not oppositional: While the new supply chain era requires a comprehensive focus on resilience, this does not mean that procurement costs necessarily must increase. A more complete and accurate assessment of actual total costs equips procurement teams with more and better insights regarding how to manage those costs and opportunities to eliminate potential redundancies.
- Procurement resilience is a function of visibility, accuracy and speed: Supply chain resilience requires dual sourcing, contingency plans and a truly complete accounting of costs — including those related to continuity management, logistics workarounds, customer satisfaction declines in response to delays, and more. Procurement resilience equips organisations with sharper visibility into the purchasing and performance related activities that either enhance or weaken supply chain resilience. Maintaining an accurate and current assessment of these factors enables procurement teams to react quickly when disruptions or changes arise.
Finally, business and procurement leaders should recognise that there will be no post-pandemic back-to- normal. The seeds of a new supply chain era were sown prior to COVID-19. Businesses have adapted to new supply chain eras in the past — think of the move from purchasing to strategic sourcing in the 1990s, or offshoring in the early 2000s. Now, they need to adapt again, which means that procurement also must transform.
 “Gartner Survey Finds 87% of Supply Chain Professionals Plan to Invest in Resilience Within the Next 2 Years,” press release, Gartner, February 10, 2021: www.gartner.com/en/newsroom/2021-02-10-gartner-survey-finds-87-of-supply-chain-professionals-plan-to-invest-in-resilience-within-the-next-2-years.