In today’s dynamic and unpredictable business environment, companies face various challenges such as changing consumer demands, global uncertainty, and the impact of natural and man-made events. Procurement and Supply Chain Management are essential functions that can help companies navigate these challenges, but they are often siloed and operate in separate departments. Their metrics are often misaligned as well – supply chain focuses on service and procurement focuses on the cost of acquiring materials and services. This approach results in inefficiencies, higher costs, and missed opportunities.
One area where there is a common ground for procurement and in-bound supply chains is to drive resiliency in operations and ensure business continuity. When products don’t arrive at the right place, the right time and the right quality, both in-bound supply chain planners and procurement buyers face unplanned plant shutdowns or upset customers . Legacy categorization of products into direct and indirect goods hamper the focus on identifying common grounds and gaining resiliency. In this article, we identify key approaches by which companies can evolve their procurement and supply chain operations into a collaborative supply chain network that is designed to be resilient and responsible.
The shift from traditional purchasing to a collaborative supply chain network is not just a change in nomenclature; it represents a fundamental transformation in the way organizations manage their supply chains. While purchasing was primarily concerned with obtaining goods and services at the lowest possible cost, there needs to be a more strategic approach. It involves collaborating with suppliers to create long-term relationships that benefit both parties. By working closely with suppliers, organizations can improve the quality and reliability of their in-bound supply chains, reduce costs, and increase their overall efficiency.
The purchasing of products at companies can be looked at in terms of two major dimensions: supply risk and impact on production (Figure 1). All the products and services purchased by procurement and supply chain organizations can be categorized into this two-by-two matrix. Each organization may look at this categorization in a slightly different way based on their specific requirements as well as supply chain conditions.
Traditionally what we typically refer to as indirect goods are mostly in Category 4. However, there are likely to be indirect goods that fall within Category 1 and Category 2 as well. For instance: pumps and motors as MRO repair parts for industrial machinery. The costs associated with purchasing these items hit the “operational expenses” components of the company’s financial statements. For a large enterprise, operating expenses are typically about 30% of overall revenue.
What we categorize as “direct goods” can also fall within all the four categories but the biggest area of direct goods spend is within Category 1. The direct goods spend is mainly for the Bill of Material products and services that a company sells to its customers. These costs fall within the “Cost of Goods Sold” components of the company’s financial statement. For a large enterprise, COGS are typically about 35% of overall revenue.
The products can move across these categories based on specific supply chain disruptive conditions. For instance, chips and sensors became a Category 1 product during the pandemic. Personal Protective Equipment (PPE) also became a Category 1 product during this time.
Procurement organizations typically are given the responsibility of purchasing items that are not part of the Bill of Materials (BOM), whereas the in-bound supply chain organization focuses on BOM items. This myopic lack of focus on supply risks and product risks for purchasing results in significant process in-efficiencies in the way sourcing, contracting, purchasing, invoicing and payments are done for each of the four categories of the products above since they are handled by different departments or processes. The common goal for all categories of product is that they must be available at the right time, right quantity and right prices. In other words, being resilient in the face of highly disruptive market conditions that we are facing is a goal for both procurement and supply chain organizations.
We propose the following five approaches to drive resiliency in procurement and inbound supply chain operations and helping evolve towards a collaborative supply chain network:
Key requirements for becoming resilient:
Manage supplier risks: Identify supplier risk to secure the supply base, remove supply uncertainty, and build further resiliency by sensing, predicting, monitoring, and simulating supplier performance. These supplier risk management activities are agnostic of the categories of suppliers whether strategic or not. The urgency of response to a disruption of a Category 1 supplier is of course much higher than that of a Category 4 supplier.
Test your resiliency through digital twins and scenario planning: Using a digital twin to model disruption scenarios, simulate and identify the most critical failure points as well as customers and products more exposed to external shocks in supply and demand. Conduct this resiliency test for all categories of products and suppliers.
Drive supply chain collaboration: Provide the needed transparency for suppliers to be able to respond to purchase orders at a detailed level and indicate how capable they are to fulfill customer requirements at any point in time. Drive resiliency through bi-directional communication between buyers and suppliers across the critical categories of products.
Optimize sourcing: Focus on optimizing sourcing spend across all categories of products. Conduct sourcing scenarios on a regular basis to identify new opportunities and ensure that the procurement and in-bound supply chain organizations work with their strategic suppliers in the most cost-efficient manner possible.
Leverage AI to benefit from supplier community data: Building trusted relationships with suppliers is an imperative for success. It is essential for companies to be part of a community that contains validated and trusted suppliers with whom they can collaborate on supply chain resiliency and sustainability. When suppliers and buyers participate in transactional, collaborative, and orchestrated processes, the community generates data that is useful for all the parties involved. Given the large volumes of raw data that is available as a result, AI becomes an important tool to parse through all the information and generate valuable insights.
Collaborating with suppliers ensures that any disruption is flagged in advance and supply chain resiliency is improved and business continuity is maintained. Inbound synchronization of supplies is critical for ensuring business continuity and assurance of supplies irrespective of the category of products. Reducing unplanned downtime and supply assurance is a critical metric for both procurement and supply chain professionals and there is significant opportunity for finding common grounds and initiatives.
Dr. Madhav Durbha is the Vice President of Supply Chain Strategy Coupa Software, where his team helps customers and prospects solve various supply chain challenges. Prior to Coupa, Dr. Durbha held positions at LLamasoft, Kinaxis, JDA Software and i2 Technologies, Inc. With more than 20 years in the supply chain industry, Dr. Durbha has broad experience in strategy & process consulting, supply chain software, program management, software application development & deployment, machine learning and data science. He received his Ph.D. in chemical engineering from the University of Florida and his bachelor’s degree in chemical engineering from the Indian Institute of Technology at Madras.