Podcast | Strategic Sourcing: Gaining Advantage, Mitigating Risk – with Lucas Manganaro

Kevin Donahue: A Supply chain management continues to be a hot topic in countless organizations in light of ongoing geopolitical challenges, evolving impacts of climate change, new tariffs, changing labor markets and much more. How can supply chain and procurement leaders attack these and other challenges? It starts with building and implementing a strategic sourcing strategy.

This is Kevin Donahue, a senior director with Protiviti, welcoming you to a new edition of Powerful insights. Protiviti recently published a white paper, Strategic Sourcing: Gaining Advantage, Mitigating Risk, which dives into this topic and provides practical guidance on anticipating and mitigating supply chain risk while improving resilience and responsiveness. I recently had the pleasure of interviewing Lucas Manganaro, one of the authors of this paper. Lucas is a managing director with Protiviti and leads the Supply Chain Innovation practice. Throughout his 20-plus-year career, Lucas has held multiple supply chain and procurement leadership roles focused on transforming business processes and leveraging technology to improve top- and bottom-line results.

Lucas, thanks for joining me. Great to speak with you today.

Lucas Manganaro: Yeah, great to be with you, Kevin.

Kevin Donahue: Supply chains today, whether they’re regional or global, seem to be as fragile as ever. Why is this the case? Is it a matter of better data analytics and reporting revealing problem areas to these organizations with greater precision and frequency, or are there other factors at play?.

Lucas Manganaro: It’s a couple of things that are working against supply chains. The speed with which things change on the global stage has increased substantially. If you think about supply chains being as resilient and as flexible as they’ve ever been, the world has gotten more volatile around them. That makes them appear more fragile in comparison to history. In addition, there have been decades of investments made in leaning out supply chains and trying to cost-optimize.

But those cost optimizations, in many cases, have resulted in trade-offs, and some of those trade-offs mean that it’s very expensive and it’s very challenging to make large-scale changes to those very lean and very efficient supply chains. For instance, if a lot of the dependency upstream in the supply chain has been concentrated in a particular country, and then we have an exogenous event that disrupts everything coming out of that country or adds cost to everything coming out of that country, the ability to pivot can be limited, it can take a while to do that and it can be quite costly. In a world where volatility has increased and the speed of that volatility has increased substantially, and supply chains have made themselves quite lean and quite efficient over many decades, pivoting is not as simple as we all wish it was.

Kevin Donahue: With regard to this volatility, are you referring, say, to geopolitical volatility, regulatory volatility, cyberattack- and ransomware-type volatility, or all of the above?

Lucas Manganaro: Unfortunately, it’s all of the above, and when you think of it that way, it starts to sound like a scary world, and it gets pretty easy to get a little bit pessimistic. But it’s really a matter of all those things changing in small ways, but on top of each other, and then you get compounded risks. The volatility geopolitically certainly is an issue today, but that manifests itself in the form of volatility and tariffs, in the form of currency concerns, taxation concerns, country by country.

All these things, each taken in isolation, probably wouldn’t be enough to make your average company contemplate a physical change to their supply chain. But when you start compounding them, it can get costly quickly, and moreover, it can create shortage challenges. Many supply chains had the luxury over years and years of stable geopolitical environments, stable currency environments. We all had the luxury of taking a wait-and-see approach when things popped up that represented risk.

We don’t have that luxury as much today because while we maybe can absorb a certain degree of temporary cost, it’s very difficult to absorb absence of inventory because that becomes a revenue hindrance. You lose the inventory that’s available to promise, and you lose the ability to fulfill customer orders. And customers, unfortunately — or fortunately — have a very strong memory when things don’t go right. In this world — and I don’t think it’s going to slow down the pace of change, the amount of volatility — we have to adapt to it, and we have to be ready to contemplate revenue-side impacts and cost-side impacts at the same time. That means we need a whole lot more data that’s a whole lot more easily accessible.

Kevin Donahue: I left out climate volatility, whether from drought — and I know everything that’s happened with the Panama Canal, as well as hurricane, typhoon and cyclone impacts around the world and what those things do.

Lucas Manganaro: And even as simple as just good, old-fashioned shipping disruption domestically — over-the-road trucking is still a big part of most domestic retail and consumer supply chains, as well as the steamship lanes and the rail lanes. All these things are susceptible to weather changes. The challenge, again, is when the expectations, particularly of consumers, are increasingly for immediate satisfaction of an order. In the timelines you have to work with when you have a disruption, whether it’s caused by weather or something else, everything happens very quickly. In a world where you can hop on a very well-known retail website and purchase most things you would want and have them at your door the same day or the next day, that leaves very little margin for error.

Kevin Donahue: And Lucas, the challenges you’ve been describing, would you say they are industry-agnostic, or are there specific industry segments, such as consumer products and retail, that are particularly vulnerable?

Lucas Manganaro: The large buckets of issues — the risks around geopolitics, taxation, currency, weather, shortages of raw material — these things impact most industries, but they impact them differently. If you go up to the big picture, it’s relatively industry-agnostic. But which things cause the worst impacts gets very industry-specific very quickly.

As you can see with issues like labor, for instance, in certain industries where we have a high dependence on domestic labor, whether it be parcel shipping or even assembly of automobiles, retail — frontline retail staff — you need a domestic workforce. That domestic workforce is in shortage right now and quite costly, so it’s hard to avoid those impacts when they’re local and they’re specific to your business model. Which impact is going to be the worst and which one is going to be the most difficult to mitigate is a very industry-specific set of questions. But the broad buckets of risk, whether it’s cyber weather, etc., they’re affecting everybody.

Kevin Donahue: Great. You’ve done a super job of defining the landscape. We recently published a paper, and you coauthored it: Strategic Sourcing: Gaining Advantage, Mitigating Risk — and we will include a link to that paper in our show notes. In the paper, you address the importance of shifting the organizational mindset to a strategic sourcing strategy. What is this, exactly, and how does this approach differ from what many organizations are doing right now in regard to their supply chain management?

Lucas Manganaro: I’ve been doing strategic sourcing work for clients for a very long time. Over that time, the definitions have shifted a little bit for convenience. A lot of organizations refer to strategic sourcing. Let’s separate the direct side from the indirect side. On the direct side, your sourcing is very much strategic. Always, you’re dependent on your suppliers, perhaps as raw materials for your product or as suppliers of finished goods, if you’re a retailer. Those relationships are strategic in the sense that they’re absolutely core to the revenue model of the business, and those partners are essential. On the indirect side, you often have a little bit more flexibility.

But regarding the language that has been used over the last, let’s say, 10 years, often, “strategic sourcing” actually meant RFP, RFI, RFQ — RFP-type activities where you’re bidding a specific scope of work to a limited set of suppliers in order to, hopefully, increase service levels, reduce pricing, etc. That often gets referred to as strategic sourcing.

But it falls a little bit short, particularly in an environment like we have now, where we need to get a lot more strategic about our sources of supply — not just the simple requirements of the items or services that we’re purchasing, the piece price and so forth, but we also need to start thinking about, what is the purpose behind what we’re purchasing? What are we trying to accomplish? Does it need to be accomplished with a like-for-like purchase? Are there alternative ways to accomplish the same end or alternative locations to go to right — sourcing from different countries than we have sourced from in the past? How do we identify quality supply bases or nurture quality supply bases in countries in which we haven’t been doing business for a while? Where can we replace products with services? Where can we replace services with technologies?

These are the things sourcing organizations increasingly need to be considering as they build strategies going forward. It’s simply not going to be adequate from a risk-mitigation standpoint to identify a series of four or five or six suppliers and go to them on a repeat basis, trying to bid down pennies of cost on a unit.

Kevin Donahue: In the paper, you address some approaches to accomplish those objectives. This approach encompasses a number of key principles, practices and systems. Can you walk me through those briefly here?

Lucas Manganaro: Some of these are going to sound quite traditional, at least to the procurement folks that may be listening in: conducting robust spend analysis, doing supplier identification, vetting, onboarding, discovering new sources of supply, nurturing new sources of supply where they are not at scale or don’t exist in the form you need them in. These are all things that the average chief procurement officer and their organization would say they’re doing today.

They take on a new meaning in the environment we’re facing now, so let’s take them one at a time. If we talk about doing basic data cleansing and spend analysis, what do we really mean? Well, we can’t stop at transactional analysis. We need to start looking at other sources of data to better understand, what is the nature of that spend and the relationship with the supplier? What are they delivering to us that adds value to our organization and our core mission?

In some cases, when we identify that value, we’re going to find alternative approaches to producing that value versus what we have traditionally been buying — supplier identification. Many years ago, there were large printed books of suppliers, and your average procurement agent was your category manager, who had one of those books on their desk, and they went through and identified suppliers in that way.

That’s not working anymore — that’s not reasonable anymore. Thinking about how to discover suppliers in a global environment where you may be switching between countries of supply, it’s a different activity that requires a different set of tools because getting it wrong has never been more costly than it is now. The processes of onboarding suppliers, contracting, bidding, all these things are increasingly important to get right because we’re going to be doing it a lot more often than we have in the past because things may disrupt our relationships with our existing suppliers that are outside of the control of both parties.

Kevin Donahue: A quick follow-up to that: To whatever extent the average procurement function is technology-enabled to support some of these areas, like supplier onboarding management and, obviously, data, the level of criticality is around having the right technology to help with this given the changing landscape you’ve been discussing.

Kaitlin Kirkham-Cooper: Where procurement organizations have been fortunate is that there’s a large list of innovative technology companies and software companies out there. That space has had no shortage of new entrants over the last two decades. Whether it’s procure-to-pay systems, e-sourcing or spend-analytics solutions, contract lifecycle management solutions, there is a lot of technology that’s available, and that technology landscape has a lot of participants that are pushing each other.

That’s good from an innovation standpoint. On the flip side of that, you can get an indication from the process-mining industry that procurement is one of the best early use cases for process mining because a lot of what procurement does is transactional. It has time stamps, and there’s a lot of back-and-forth with suppliers. It’s relatively easy to map, and therefore it’s relatively easy to mine.

What’s interesting, though, is where those technologies struggled in the early days. They found that so much of what your average category manager, your average procurement analyst or tactical buyer, was doing was outside of those systems. So here, we have all this horsepower with these great packages that are available in the market, and yet our people are spending a large part of their effort outside of those systems.

That points to two different things: One, there are gaps. The systems are designed to be profitable, and therefore they’re designed to solve the big problems, which leaves space between those problems — small problems that aren’t necessarily profitable to solve as a software company. Those are left to the clients to solve, so that’s a challenge. Also, if you have a series of those applications throughout your tech stack — even just your procurement and finance tech stack — they’re not necessarily designed to work with and talk to each other, so you have translation issues, integration issues, the work between the work.

That’s where there’s an opportunity for a lot of increased focus on technology investment — not in the large packages, which many mature organizations already have and have spent quite a lot of effort on, but focusing on the in-between spaces: How do I make it easier for my folks to use these big tools and not be working 50% in an Excel spreadsheet and then plugging that into a multimillion-dollar piece of software I’ve purchased? We can do that in a lot of cases nowadays by upscaling our folks and using the tools that are available.

Most large organizations have a hyperscaler, whether it’s Google Cloud or Azure or it’s Amazon Web Services. These are creating ecosystems of Lego bricks where a person who is technical but not supertechnical can go and assemble a product from all these services that accomplishes one of in-between tasks without making a multimillion-dollar software investment. That is the future that we all need to be focused on — the work in between the work: How do I build tools that don’t require massive support, that are based on crowdsourced capabilities, that average business user can leverage?

Kevin Donahue: Let’s pivot and talk about customers — specifically, about meeting customer expectations and the customer experience, two very important enterprise priorities for all organizations today. How does better supply chain planning and inventory management support these critical objectives, particularly when thinking about organizations like consumer products and retail, where product availability is so important?

Lucas Manganaro: You said the most important part there, right at the end of the question: Product availability is so important, and we live in a world where consumer expectations are growing every day. Whether it’s the proliferation of options of things that are available to them or the expectation that they can have them when they want, where they want, how they want, those expectations aren’t going to go backward. The ability to meet those expectations requires a much closer understanding of what demand is likely to be. It requires a much greater understanding of what your supply constraints are to meet that demand.

Again, in a world of increased competition, cost is still a challenge, so we can’t simply turn our back on decades of cost management and cost efficiency and say, “We’ll just overbuy everything.” There isn’t margin available in a competitive world to support all that inventory. We have to stay lean, but we have to stay very close to the demand signals that are out there.

And, by the way, those demand signals now come from a much wider array of sources, so we’re talking not about just channel partners who have a structured approach to ordering from you and a predictable way of buying. We’re talking about social media. We’re talking about very unstructured sources of data that can give us indications of what demand is likely to be for a particular product or set of products. If we don’t pay enough attention to those things, or interpret them incorrectly, it’s very easy to do everything right from an execution standpoint but execute the wrong plan because you misunderstood the signal.

The importance of planning has never been greater, but also, the ability to pivot on the execution side to meet that plan has never been more important. The pressure on downstream supply chains in a world where planning is very adaptive, the pressure on the supply chain execution side is much greater than it’s ever been.

Kevin Donahue: Lucas, this has been a fantastic conversation. We could go much more into that topic around meeting customer expectations and the data involved alone. But if I’m a supply chain or procurement leader in my organization, what are the roadblocks I can expect to encounter as I build and implement my strategic sourcing strategy? Perhaps more importantly, what are the best approaches to address these roadblocks?

Lucas Manganaro: The roadblocks I see impacting clients most frequently include that talent has to be at or near the top of the list. And it’s not just the availability of talent. It’s the motivation. We have to have an engaged workforce — not just available but also engaged. We need them to be innovative. We need them to push boundaries. And frankly, we’re relying on a high degree of optimism as we ask people to solve problems that don’t have a standard solution. That means there’s a lot of competition for the very best talent, but also, we need to be cultivating talent.

Some of the things that, historically, you could solve very short-term — “I’ll just go buy talent” — that’s not so easy anymore. If you’re not providing a good environment and a good career path to nurture that talent, it’ll leave as fast as it came. That is a big challenge. Getting the right talent and creating an environment that encourages and cultivates that talent is super important.

Also, a lot of the ways in which we have scorecarded and measured ourselves historically very much narrowed the focus of the day-to-day work, and that leaves us, or creates the potential to leave us, blind to the big movements. As I stressed earlier, we’re in a world where in a lot of cases, products are going to be replaced with services, and services are going to be replaced with technology, or at least augmented. We need to be thinking about alternative methods of achieving an outcome, not just think of ourselves as people who buy things on behalf of the organization. We have to cultivate an environment of innovation, and that innovation has to be in lockstep with the core mission of the enterprise we’re supporting.

Kevin Donahue: What a great conversation. I want to thank Lucas for joining me today to discuss these issues that are certainly impacting organizations around the world.

Two things really stood out to me: One, organizations need the right data to attract this issue. Two, they need the right people to attack this issue. For more information, I encourage you to read our white paper Strategic Sourcing: Gaining Advantage, Mitigating Risk. You can find that on our Protiviti website, and I’ll put the link in our show notes. As always, I remind you to please subscribe to our Powerful Insights podcast series and review us wherever you get your podcast content.