Procurement resilience in a VUCA world
All businesses are currently operating in a VUCA world where there is the constant pressure of market volatility, uncertainty, complexity and ambiguity. However, despite the changing environment, procurement’s role remains unchanged and focused on ensuring that business operations continue like clockwork. To do this requires the ability to foresee potential future environments and preparing for them. Understanding the current environment will allow those working in procurement to plan for market changes. Unfortunately, manufacturers are likely to operate with more uncertainty and face more unexpected crises, placing an extra burden on the Procurement and Supply Chain functions.
All manufacturing industries are important, but with the supply chain disruptions of the past year, coupled with pandemic induced consumer panic buying, the food and beverage supply chain has come under the spotlight. Procurement teams need to make sure they’re on top of their game when selecting and evaluating new vendors, cutting costs without adding risk to the business, negotiating and renegotiating contracts, ensuring traceability of all incoming raw materials, and reducing risk along the supply chain.
According to a recent report, Risk, Resilience and Rebalancing in Global Value Chains, “companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events take a major financial toll.” McKinsey analysts also calculated the damage associated with a severe and prolonged disruption (100 days) and used probabilities to estimate the financial impact that companies can expect over a decade. The report predicts the global food and beverage sector can, on average, expect losses equal to almost 30 per cent of one year’s profits over a decade.
To help manage the disruptions caused by the pandemic and plan for the unexpected, food and beverage manufacturers should look at a four-step strategy to de-risk procurement and supply chain functions in the wake of global vulnerabilities.
Step 1: Anticipate and plan for uncertainty
Today, the rigorous process of gathering information is being replaced with a data-driven approach. This enables real-time decision-making with businesses building AI-driven integrated data ecosystems that are underpinned by predictive analytics and can then be applied in forward planning on both strategy and performance.
Food and beverage manufacturers and distributors can also use technologies such as Enterprise Resource Planning (ERP) to accurately forecast items like demand, stock availability, supplier lead times, cost, raw ingredients and contingency stock requirements; and integrate this into their unique business model. ERP can help procurement de-risk as it provides a single integrated platform that shares all the information across all functions. This allows manufacturers to optimise inventory forecasting capabilities and improves the quality of the decision making within the organisation.
By making a direct link between supply and demand, food and beverage manufacturers and distributors can anticipate and better plan for uncertainty and ultimately improve the cash flow of the organisation.
Step 2: Embrace the limitless potential of digitalisation
With the pandemic, many manufacturers now realise the true potential of digital transformation in the procurement process.
Digitalisation can assist strategic sourcing in becoming more predictive, transactional procurement more automated, and supplier relationship management more proactive. Digital procurement solutions are enabling the future by providing access to previously unavailable insights or bringing order to massive (but unstructured) data sets, ultimately driving more complex analysis and better supplier strategies, enabling more efficient operations.
Step 3: Enable end-to-end supply chain visibility
World crises have resulted in procurement teams scrambling for alternative and locally based suppliers to ensure that they can still fulfil existing orders and continue to produce with new orders. End-to-end supply chain visibility is, therefore, a necessity to ensure procurement accuracy and resilience. Such advanced insights are needed to improve customer service, reduce costs and mitigate interruptions that will affect supplier inventory levels and product delivery. With customers demanding better service, embedded AI capabilities provide real-time intelligence, actionable insights and recommendations that reduce disruption time from days to hours, improving customer service in line with expectations.
Step 4: Focus on building a robust procurement model
There are no standard business models to help food and beverage manufacturers manage what we are currently facing. This pandemic has exposed the fragility and thin margins on which many businesses run. Highly indebted companies, working from lean inventory, supported by just-in-time supply chains, and staffed by short-term contractors, are suffering the longer-term impact of market unpredictability.
Food and beverage manufacturers and distributors need to identify their own business model that will suit their business and consider how to reengineer their supply chains to reduce risk through design, factoring in increased complexity and uncertainty as the new normal. In future, effective supply chain management will be all about agility and finding the perfect balance between just-in-time processes and just-in-case scenarios while reducing risk as much as possible.
Global crises are an inevitable factor in life. By planning for the unknown, implementing the right technology for end-to-end supplier visibility and building a robust procurement model, food and beverage manufacturers and distributors can de-risk procurement and supply chain functions and enable resilience in an uncertain world.
AICPA: The State of Risk Management
In the fall of 2020, the American Institute of Certified Public Accountants (AICPA)surveyed 420 members of the AICPA’s Business and Industry group who serve in chief financial officer or equivalent senior executive positions representing different sizes and types of organisations— resulting in The 2021 State of Risk Oversight report.
Let’s review its key findings.
First, to ensure a clear understanding of our starting point, let’s review the drivers.
The report states that “risk volumes and complexities are at their highest level in 12 years, increased by significant events tied to COVID-19, social unrest, national elections, extremely low-interest rates, and a host of other risk triggers – no type of organization is immune”.
The supply chain disruptions brought on by the global pandemic changed the nature of top risks, with core operations having been significantly impacted by risk events, highlighting the need for improved risk management and continuity of business plans.
Organisations are also facing further pressures from stakeholders to provide more information on risk and mitigation strategies.
Despite the well-accepted need to better prepare for the unforeseen, only 30% of respondents report they are “mostly satisfied” or “very satisfied” with their organization’s Key Risk Indicators (KRIs).
From JIT to JIC— When in Doubt, Stock
It’s been said that a companies shortcomings can be seen in its safety stocks. Safety stocks or increased inventory levels have their time and place and are a legitimate mitigation tactic. However, companies are often quick to jump from JIT to JIC in place of evaluated, strategic decision making where trade-offs are consciously made based on organisational objectives and values.
Although there is a growing trend towards increasing safety stocks and buffering supply chains, the report states that the majority of organisations have not taken the extra step of aggregating risk information to an enterprise-level inventory of top risks. Organisations continue to struggle in integrating a more formal risk management approach and implement strategic action plans.
Financial services aside, most companies are not considering risk exposure when evaluating possible strategic initiatives or making capital allocations. i.e., risk is not even considered when making some of the business’s most important decisions.
Critically for Procurement, who are often in the position of having to make those critical tradeoffs, most organisations do not formally articulate tolerances for risk-taking as part of their strategic planning activities.
The report also highlights that there is considerable room for improvement when it comes to mitigating reputation and brand risk.
ERM— We’ve come some of the way, baby…
- • While progress has been made in implementing complete ERM processes, more than two-thirds of organizations surveyed still cannot claim they have “complete ERM in place.”
- • Public companies and financial services organisations exhibit the biggest move towards ERM in 2020.
- • With the exception of non-profit organizations, most types of organisations believe their risk management oversight is more robust or mature than any of the prior four years. But we aren’t quite there yet...
- • Fewer than half of respondents describe their organisation’s approach to risk management as “mature” or “robust.”
The Impact Culture on Risk
Some organisations believe other priorities stand in the way of more advanced risk management and that risk is managed in more informal ways, impeding the move to ERM.
The report also indicates that most organisations fail to provide training or guidance on risk management. This can potentially lead to a lack of understanding of the imperativeness of proactive risk management efforts and their ability to improve a companies performance.
Furthermore, risk management is not incentivised, with few organisations embedding risk management incentives into performance compensation arrangements.
There seems to be a misalignment between a companies tolerance for risk and its risk management actions. Despite the majority of organisations describing their risk culture as “strongly risk-averse” to “risk-averse”, only a minority of respondents describe their risk management processes as “mature” or “robust.”
So, it would seem, organisations are aware of the heightened need for risk management, consider themselves to be “risk-averse”, even perhaps strongly so, yet have immature risk management processes and a culture that impedes progress.
The question remains, what, if anything, will companies do about it?
For a detailed analysis that provides helpful perspective and benchmarking on risk management, download the 2021 State of Risk Oversight report.