The Hackett Group’s 2021 Key Issues Study reveals some very interesting information as it relates to the thinking of top procurement executives. It should come as no surprise that after the challenging year all businesses witnessed in 2020, these procurement executives are more focused on what’s really important to the future success of their businesses.
The study focused on four emerging enterprise themes including risk, people, cost and digital acceleration. Respondents to the survey indicated they believe stability will remain elusive. Nearly 41% believe conditions will stabilize by the second half of 2021, while 36% believe it will take longer. Of course, no one can truly predict when things will return to normal, and in fact, if we’ll ever be able to define the word “normal” again.
The report highlights 10 key procurement issues:
1. Reduce spend cost
2. Reduce supply risk to ensure supply continuity
3. Act as a strategic advisor to the business
4. Accelerate procurement digital transformation
5. Improve procurement agility
6. Modernize procurement application platforms
7. Align skills and talent with changing business needs
8. Improve analytical and reporting capabilities
9. Enable corporate sustainability goals
10. Increase spend influence
Let’s take a deeper dive into the Top 2 procurement issues predicted to have the most impact on businesses in 2021 and beyond.
Reduce spend cost
Reducing spend cost, especially in the supply chain and areas of transportation and logistics, should be an ongoing function of every procurement team, in full coordination with the company’s logistics and supply chain teams. The real question however is, where does a company start to look at cost reductions? And, what metrics should it use to benchmark costs to ensure best-in-class pricing for all supply chain and logistics services offered?
One way to reduce costs is to reduce the service levels a company receives from its logistics service providers. Less service, less costs. However, is that really a cost reduction initiative a company should consider? Probably not. However, many companies do just that without even realizing they have made that commitment. So, the first step is to fully understand what service levels a company needs to fully support their operations as well as their customer’s needs.
Having sad that, does the company fully understand what their service requirements are? Very often there is not a lot of corporate focus on measuring service levels as a way to control costs.
To give one example, an LTL shipper agrees to do business with a carrier whose rates are much lower than their current service provider. However, they really didn’t do their homework and did not understand that not only was this carrier’s on-time delivery performance well below industry standards, but also it’s claims ratio was much higher than industry standards. Because of a lack of due diligence, the company moved forward with this new LTL carrier. And, while they did reduce their shipping costs, they sacrificed their customers in return.
The point here is that companies really need to look much deeper into their operations to see where cost reductions can have the most impact without sacrificing other parts of the business. Losing a customer’s business is certainly a way to reduce shipping costs. It’s just another example of not being customer-focused in every decision a company needs to make.
In another example, a subscription box company was preparing to re-negotiate their parcel carrier contract and needed to analyze the pricing agreement the carrier presented to ensure they weren’t leaving “any money on the table.” The company thought the deal they had negotiated with their parcel carrier was in fact a very good deal, but realized however that they were not able to benchmark the parcel carrier’s offering to ensure they would actually receive “best-in-class” rates compared to other shippers with similar shipping characteristics and similar spends.
Analyses revealed that this company’s annual parcel spend exceeded $58 million, and had they signed the agreement before the analyses, it was in fact leaving money on the table to the tune of over $7.7 million annually.
The message here is that when a company does not have the capability to comprehensively benchmark overall costs, it should seek out expert advice if the procurement group does not have access to the proper measurement tools to be able to determine a good deal from what could be a very bad deal.
Reduce supply risk to ensure supply continuity
If 2020 will be remembered for anything, it will certainly be remembered for the Coronavirus disease (COVID-19) global pandemic. It will also be remembered for making the term “supply chain” a household term.
Yes, in 2020, just about everyone’s supply chain was challenged, to say the least. Many companies were for the first time in a state of disruption never seen before. Talk about risk, when China shut down their factories in early 2020, many companies lost access to their only supply of raw materials or finished products.
Then two new terms that really never had much of an impact on U.S. businesses until COVID-19 hit were nearshoring and reshoring. In the first quarter of 2020, companies were now forced to consider sourcing their raw materials and finished goods from suppliers closer to home, or reshoring, which means having suppliers right here in the United States.
For years, all types of companies continued to seek less expensive costs for their goods, and China certainly played a large role, if not the largest role, in that process. Today, more so than in the past three decades, the question is, should we cease doing business with Chinese suppliers? Can we really accomplish that?
There is the Catch-22 situation of having China, with its 350 million people, the likely target for U.S. businesses over the next 20 years and beyond. Bottom line is that reshoring and nearshoring, as a way to reduce supply risk and ensure supply continuity, may not be as simple as their terms imply.
