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.
The Risks of Paying Ransoms, Darkside Group Gets $5Mil
On May 7th, a ransomware attack, now confirmed by the Federal Bureau of Investigation (FBI) to have been the acts of the criminal network group Darkside, forced Colonial Pipeline to proactively shut down operations. On Friday, Bloomberg reported that Colonial Pipeline paid the nearly US$5 million ransom in untraceable cryptocurrency within hours after the attack.
Colonial Pipeline provides nearly half the fuel supply for the U.S. East Coast. Stores of gasoline, oil, jet fuel, home heating and military supplies were all so heavily impacted that to help with the shortages, the Federal Motor Carrier Safety Administration's (FMCSA) declared a state of emergency in 18 states. Widespread panic buying began to cause shortages. In metro Atlanta, 30% of gas stations have run out of gasoline. In Raleigh, North Carolina, 31% of gas stations had no fuel on Tuesday. Meanwhile, unleaded gas prices hit an average of $2.99 a gallon, its highest price since November 2014, the American Automobile Association said.
Once the ransom payment was received, the criminal group provided Colonial Pipeline with a decrypting tool to restore its disabled network. On Thursday, the largest fuel pipeline in the U.S., which carries 100 million gallons per day of gasoline, diesel and jet fuel, began moving some of the first millions of gallons of motor fuel. On Friday, Colonial Pipeline ramped up deliveries to fuel-starved markets on the East Coast. Although the attack was the most disruptive cyberattack on record and underscored the vulnerability of vital U.S. infrastructure to cyberattacks, the paying of the ransom set a dangerous precedence. It's generally accepted as bad practice to negotiate with terrorists. It's generally accepted as bad practice to negotiate with terrorists.
The High Risks of Paying Ransomes
Adebayo Adeleke, a U.S. Army Veteran, thought leader and speaker on geopolitics, risk management and security took a moment to share his concerns with Procurement Magazine on the precedence being set. "Historically, we don't negotiate with terrorists. Paying the ransom for a cyberattack and engaging them in monetary negotiation is legitimizing their efforts, goals and means. Ransomware is all about the money, and it's profitable, and because of this, it has been used as a tool for years now. To make ransomware go away, we must make it unprofitable, and the only way to make it unprofitable is NOT to pay them.
"Yes, it's easier said than done. There are only two choices one has when confronted with a cyberattack by ransomware, pay the amount or negotiate with them or do not pay them. I understand both sides. Shareholders pressure, national security issue at stake, severe economic impact, undue hardship, job loss, impact on the local communities and the list goes on. On the other hand, rebuilding what must have been stolen might run the organization out of business and expose lapses in U.S. national security as far as critical infrastructure is concerned, and the list goes on. There is no easy way out, but the moment money is exchanged for stolen data, it sets the precedence of exploitation and legitimizes bad behaviour, and this will continue to make the behaviour profitable. Either way, the outcome is never going to restore Colonial back to norm in the needed time. It's not going to be easy to stop these acts. The inevitable has to be done.
"Terrorism, banditry, kidnapping, ransomware all follow the same tactics. Again these tactics are not new, but it's interesting that they are digitizing tactics in a very worrisome way. There is nothing absolutely new underneath the sun. As it is in old, so it is in the new… you pay them, you glorify them."