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February 26, 2016

2016 Macroeconomic Conditions Impacting Procurement

[Note: This article was originally posted on CPORising.com. Determine is pleased to contribute regularly to Ardent Partners blog on the topics of procurement and supply management. You can read the original post and other content from Ardent Partners HERE.]

Needless to say, the start of year has hardly been one for celebration. Recent volatility in the stock market has been driven by the Chinese bubble economy, oil prices hitting a 13 year low of $25 a barrel, and crisis in the Middle East. With ongoing predictions of slow economic growth in both developed and developing markets, all of these challenges are hitting businesses globally. Being inundated with nothing but bad news to kick off 2016, what does procurement need to do in this business environment?

Synthesizing all this information is critical to being able to determine if the current conditions necessitate procurement departments to not only react, but better yet, anticipate how to manage changes that impact their wider supply base. Given the evolution of spend analytics, e-sourcing, contract management, e-procurement, and supplier management, technology must be better utilized to enable procurement for adjusting buying behaviors to accommodate for these macroeconomic factors. Consider the following:

Spend & Procurement Analytics

How the procurement organization reacts starts with understanding the correlation of spend behavior to the news coming from the outside. Analytics provides a means of understanding spend and supplier trends, while anticipating what to do. Whether it is built from internal data sources (e.g., ERP, SCM) based on purchasing history, or aggregated, integrated, and enriched with third-party data, access to the right information obtained from analytics efforts, promotes the ability to understand both micro and macro trends through opportunity assessments. These efforts can then drive new-found savings while mitigating risk. Moreover, harnessing data effectively and leveraging analytic tools can begin to unlock the potential of “Big Data” in evolving areas like predictive analytics and semantic intelligence. With better analytics, procurement can then tell finance the story of how to stay at the forefront of savings, thus building internal consensus and confidence for the savings identification and realization activities that follow.

Strategic Sourcing

However, taking advantage of economic trends that favor lower commodity prices, labor arbitrage scenarios, or even just the word on the street can only be executed through an enhanced ability to quickly and efficiently source against them. Thus, establishing true strategic and operational sourcing capabilities within key category or supplier segments through either RFx or reverse auctions allows procurement to easily and readily lock in potential price advantages. Whether they are a function of geographic advantages (off-shore v. near shore) or simply locking in prices due to market price fluctuations impacted by the wider macroeconomic or geopolitical situations (e.g. price of oil due to current over supply), it matters not. Doing this effectively is exemplified by the now famous Harvard Business Review case study of Southwest Airlines, which developed a strategy of sourcing fuel from vendors that offered best prices, while hedging on fuel prices with exchange traded derivatives.

Contract Management

Once sourcing has identified and negotiated these savings opportunities, contract management then must be able to easily codify it. What this means is the ability to easily create new contracts within the system or load third-party paper, and with meta-data, tag all the pertinent and critical contract information within a procurement contract ecosystem for monitoring contract performance, compliance, and risk. Getting visibility of your new and existing contracts at the clause level helps ensure that negotiated discounts and tiered pricing are enforced at the point of purchase, which prevents “savings leakage” from negotiated pricing and reduces overall contract risk from suppliers in the form of legal actions or disputes. Within this framework, it is also essential then to have established alerts and notifications for knowing when contracts expire to go back to sourcing for expediting a new contract in a particular category. Ultimately, having the right contract analytics tool allows both legal and procurement to understand how current contracts are performing, and whether new opportunities exist for sourcing new contracts up for renewal.

Purchase to Pay

Buying against the right contract is critical for getting negotiated savings realized and meeting the end goal of maximizing savings for both direct and indirect spend scenarios. For direct spend, it is essential that the right products or services adhere to the right specification that hits the top line revenue. But for indirect spend, it is the impact of running operations. Regardless of which you are managing against, enabling your organizations to buy the products and services you have negotiated must be accompanied with the ease of finding the supplier products and services, and adding them to the proverbial shopping cart. Moreover, in considering the current macroeconomic conditions, when spot opportunities arise, procurement should have the ability to easily create scenarios for supplier quotation that is integrated into the buying process. Ultimately, procurement must be able to easily guide buyers to what they should be buying and how they should be buying them with the proper workflows that creates fluidity, and by establishing governance in the purchase-to-order, and order-to-invoice process.

Mitigating Supplier Risk

Ultimately suppliers are often the ones most negatively impacted by the macroeconomic situations. In deference to SMBs, disruption in supply chains can and will lead to financial challenges. Due to the onset of economic hardships, or perhaps lack of proper currency, suppliers may need to improve their funding options. In these scenarios, procurement has the unique opportunity to mitigate supply risk and manage the wider problem of working capital. Using dynamic discounting or supply chain financing, procurement can keep savings at the forefront by proposing improved flexibility to their supply base. The former provides an option for how and when to pay suppliers in exchange for a lower price or discount. The later takes advantage of extending payment terms, while offering early payment terms to suppliers through a financial institution or intermediary. Either way, suppliers get paid sooner and the financial impact becomes either a P&L impact, in the case of dynamic discounting, or a cash flow impact on the corporate balance sheet, in the case of supply chain finance. Ultimately, it is procurement understanding the strategic nature of the supplier relationship that can help improve scenarios where suppliers are at increased risk, especially during volatile economic conditions.

Conclusion

As the year unfolds, it is difficult to predict if 2016 will become a good or bad year in terms of the stock market. But for businesses at large, much work is needed still to manage against the risk of sudden economic downturns. Perhaps the take away is in understanding that flexibility is the name of the game in this day and age. Thus, procurement has a unique opportunity to play a strategic role in improving collaboration with internal and external stakeholders. For procurement, this means having the right processes in place, enabled by technology, for managing against current and abrupt macroeconomic conditions and understanding how the changes from the outside impact the ability to extend the concept of savings and risk management to the wider organization.

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