It is the time of year when fools willingly try to predict the trends and issues for the year ahead. The PASA CEO, Jonathan Dutton, is game to try and has compiled a shortlist of ten loose predictions and challenges for the procurement year ahead in 2023.
An easier way to predict the future is to simply extrapolate the past. But, then, who foresaw Covid-19?
Yet in supply side terms, the cause of supply chain interruption is not quite as important as the possibility that supply can be interrupted for a wide range of reasons. In recent the past we have had volcanoes, earthquakes, tsunamis, wars and even pirates interrupt supply lines into Australia and New Zealand. We in procurement can do little to solve such problems, but we can anticipate the likeliness of supply side problems – supplius interruptus we can call it.
The real question then, is what is our PLAN B? Indeed, do we have one, should our key supply lines be interrupted? This is the question that unleashes genuine strategic thinking for procurement managers at the very tip of the global supply chain – here in ANZ. We cannot have a PLAN B for every inbound supply chain – but we can for the most important ones, the Top 10 perhaps?
We cannot confidently predict the cause of any likely supply side failure in 2023, only the inevitability of it happening for some reason outside our control – which feels more likely than in the past. We should be prepared.
In addition, there are TEN other potential factors we might just predict into our strategic thinking for 2023?
1. The effects of inflation will get worse before they get better
According to official figures, inflation recently slipped back in Australia to 6.9% – yet, other leading nations are still struggling with higher inflation rates. Regardless, even 6.9% is a relatively high level of inflation. The target range being 2-3%. At 7% inflation, your relative cost base will mathematically double inside ten years.
With the nature of the inflation we face being ‘Cost-Plus” inflation, expectations on procurement from the C suite might be higher. Are our procurement teams fully equipped to help mitigate the effects of inflation on the supply side of our organisation?
2. Managing inbound supply chains will become more pressing
The relative failure of so many business continuity plans (BCP) during the early stage of Covid seem, anecdotally, not to have taught us as mush as they perhaps should? Have we slipped back into complacency mode?
Can we genuinely say that we have mapped our critical inbound supply lines back to the original equipment manufacturer (OEM) level through, perhaps three or five or even more supploy tiers? How confident are we that we can fulfill the buyers first professional responsibility – to assure supply? Stakeholders are sure to ask in 2023.
3. Rebalancing COST v RISK will be a key priority for all in 2023
Many procurement teams started work in 2022 on this key question – which is more important, saving cost by sourcing from lower-cost countries or reducing risk of non-supply from far flung sources?
Rebalancing this equation, certainly for your top ten most critical supply lines, should be your most urgent work in 2023 – if it is not already.
4. Evaluating your real exposure to China will also be key
Many thought Russia would never invade Ukraine. Many, however, did. The ramifications are only growing.
One CPO recently exclaimed that they had evaluated their supply side exposure of their primary operational suppliers and were 98% non-dependent on China “should anything happen” to that source of supply in future.
But, what about your supplier’s suppliers he was asked? Your tier 2 suppliers? Are they in China or even themselves over-exposed to China maybe? This CPO had no idea. This is the procurement equivalent of burying your head in the sand.
A different CPO, at one of the world’s largest brands admittedly, has from their Sydney office mapped their entire operational supply chain in this region to three tiers down (their suppliers suppliers suppliers) to ensure strategic availability, compliance and brand reputational risk protection.
How far should you go?
5. Universal ESG progress could be halted by affordability
Early in the pandemic, one CPO remarked at a PASA Roundtable about ESG in a procurement context, “who cares about that now, we have a business to save, and if we don’t, we might not be here to talk about sustainable procurement in future.” He had a point.
Environmental, social and governance (ESG) concerns and demands from stakeholders are “overwhelming us in procurement” as another CPO cried last August. The “dizzying array of ESG objectives” as The Economist magazine put it in July 2022, are showing little sign of abating for the supply side.
But the question might become, what can we realistically achieve in ESG on the supply side, what can we do that is most relevant to our organisation and have a genuine impact upon? Or, more tellingly perhaps, what can we now afford to try and accomplish in ESG terms on the supply side, as we cannot do everything and economic necessities demand priorities?
6. Building inventory as a strategy to ensure supply will unravel quickly
The Economist magazine reported their research in June 2022, that the Forbes Top 3000 global companies had on average increased stock by around 50% and increased aggregate inventory value by $1trillion in early 2022 alone. It decried this strategy, and explained their view that the best strategy against risk was not to concentrate risk (overstocking) but to spread risk (multi-sourcing).
Worse, how much is it costing consumers to pay for the Forbes 3000 to buy and hold such stock? Is this why prices are rising maybe? And what happens as this stock becomes obsolete, or gets dumped into market?
If your strategy was to build stock to ensure supply, you must now ask, what is our better strategy to ensure supply in future? On-shoring, re-shoring, near-shoring or, well, just, stocking?
7. SRM will become fully recognised as an essential supply side strategy
Supplier relationship management (SRM) is notoriously difficult to justify to your grumpy CFO.
Using three dedicated FTE supplier account managers, implementing a team SRM strategy & training programme, installing a new system offshoot for CRM in reverse, then setting up a programme of proactive regular meetings with your top 25 suppliers all sounds expensive. And “to be nice to suppliers?” asks the CFO unbelievingly, “what’s in it for us?” he adds.
What, indeed? Yet, as the CPO of a leading state health department replied, when asked how they coped with the ‘wild west’ marketplace for PPE during the height of the pandemic, “our friends didn’t’ let us down” she explained. She meant, their proactive and well thought-through SRM strategy begun in 2017 hadn’t.
8. Supply chain data security will become a CEO issue in 2023
Not so long ago, if you asked about supply chain security, stakeholders might have imagined product security, or storage systems in considering the issue.
Today, the Optus and Medibank case studies, have illustrated the vulnerability of our supply chain data security. We are as vulnerable as our weakest supplier. Are you or your CIO across this risk yet?
9. Small suppliers are still vulnerable – and many will still fail in 2023
Many small businesses failed during Covid – collapsing demand and regular bills seeing them close. Re-starting niche small businesses is not so easy either – cash costs are demanding for hiring new staff (in a skills shortage), re-stocking, re-advertising, paying rent arrears and working below equilibrium (economic order quantities) due to low volume.
Worse, accounting costs also hurt, carrying new debt, stock obsolescence, clawing-back debtors and holding off high creditors, tax arrears; all add to the cash prioritises each month or each week. Now, add on the effects of rapid inflation to this list … And, for B2B businesses, how do they also realistically straddle the cash-flow strains of the holiday period December through February managing low-income and regular monthly costs?
We already source from an oligopoly in Australia and New Zealand. Yet our market of few suppliers is getting even fewer as small and medium enterprises (SMEs) slow drop out of the marketplace.
The real question for 2023 is, which SMEs do you really need? And, what are you doing now to keep them? Large buyers could do much to help a small supplier, well short of paying them more. Who are the ones you will need, and what can you do to help them next year?
10. Covid isn’t over yet – and, anyway, what’s next?
Strict Covid management in China is creating supply issues for many. The outbreak of a new strain could yet wind-back many of the freedoms much of the world has seen return. Moreover, other unforeseen issues could yet reintroduce supplius interruptus … floods? Swine-flu? Tariffs? What’s next? – are your BCP arrangements ready? Your fool-proof PLAN B all sorted?
Jonathan Dutton FCIPS, is the CEO of PASA and an experienced procurement practitioner, manager, consultant and trainer, including for agile procurement through PASA AGILE. He is also a non-executive at SUPPLY CLUSTERS.