Procurement in Volatile Times

The traditional methods of procurement have seen a dramatic shift in the last couple of decades. With the rapid advancement in technology and an increase in access to global networks, it's not surprising that the methods of old have had to adjust to fit the current age. The COVID pandemic, shortages in supplies, looming inflation, the war in Ukraine, and the push/change in globalization have left businesses to reevaluate their procurement practices and figure out adjustments needed in these volatile times. According to McKinsey & Company, a professional management consulting firm, there are three horizons and 12 major action themes to respond to our current market of uncertainty. Below is an overview of the road map they have laid out for navigating procurement with all this in mind.

1. Enable immediate action - The goal here is to evaluate across the entire supply chain the effects of volatility and inflation. The idea is to gain transparency into the supply base. A company can do this by looking at indexing to gain a benchmark and should-costing for comprehension of their supplier's cost estimates, a company can then begin working on risk management by setting up ways to protect margins. This is where technology can help in providing analytics, simulations, and fast processing for decision-making. By implementing these a company can reduce risk and adapt quickly in the short term.

1. Take action to secure supply and mitigate price increases now and in the next months - Here a company would look at different types of levers that it would tap into to reduce cost. The article talks about commercial, technical, and cross-functional levers. An example of a commercial lever would be how Nokia made partnerships in Mexico to help make computer chips. So, when the supply shortage happened in Asia, Nokia was able to pull the lever and shift to Mexico so that they could keep up with production. An example of a technical lever would be redesign or reengineer to overcome shortages or price increases. Where Cross-functional levers look broader and would be building flexibility or ambidexterity into the plan where early detection of perhaps a long-term shortage would have already been built into the plan with backup contracts being put in place, the ability to move to different suppliers and flexibility would already be in the design plan.

1. Institutionalize to prepare for the new normal - this successfully a company will need to invest in the time to develop and build new capabilities, tools, hire new personnel who are skilled in procurement practices, invest in technology, and focus on becoming more dynamic. It's about improving current capabilities and adopting new ones to fit the needs of an evolving supply chain. This change in thinking is part of the preparation that is needed to be incorporated into the company's strategy.

In a world where labor shortages are being discussed, looming inflation and tensions globally, now more than ever a business needs to leverage all its resources in procurement. Just a few years back, a company could work statically within the margins that it created, however, doing that in this day and age might cause a company to lose its competitive advantage as words like dynamic, ambidextrous, and flexible have moved into procurement vocabulary as well as other areas inside the supply chain. If a company leverages these three horizons, it will help them in value creation and the ability to quickly adapt to volatile times. As we can see above with the three recommendations, procurement isn't just purchasing goods but it involves diving into the complexities of the supply chain itself and blending its strategies with other factions of the chain.

Discussion for the Class:

Other than what is talked about in this memo? give a discussion on other strategies in procurement a company can use or deploy when the market becomes volatile.