The world is changing so quickly. While we thought we were finally emerging from one of the largest health crises at the beginning of this year, a conflict started at the doors of the European Union creating unpreceded effects on the rest of the world.
As I am writing, Covid lockdowns continue in China, putting pressure on large multinational production sites. Inflation is hitting many countries and the cost of raw materials continue to rise. In response, suppliers are increasing their prices (sometimes as much as 10%-15% over last year), which inevitably impacts the overall economy and supply chains. Companies from small to multinationals are resorting to workforce reduction to cope with the investments they have made in an attempt to mitigate the risks of the rise of raw materials, products, and services.
How does procurement keep up in such an environment?
If your procurement group hasn’t invested in the importance of securing relationships with suppliers through procurement collaboration, chances are the next invoice will be pretty painful. By not placing importance on supplier relationships, you’ll likely incur significant price increases and because you haven’t nurtured these relationships your negotiating power may be much weaker, especially in a time of crisis.
However, if you already recognize the importance of supplier collaboration, your suppliers will consider you a top customer, which puts you in a position for better pricing and more negotiating power. Now more than ever, many companies will try to reduce costs by re-negotiating with their suppliers, which could be well-suited for transactional suppliers, however, be careful with strategic suppliers. They are your bread and butter and critical long-term relationships.
The post-crisis outlook for companies investing in supplier innovation and supplier collaboration is more favorable than those that do not make supplier relationships a corporate priority. Strategic suppliers are just as important as your strategic customers; they can enable you to grow or cripple you to fall. Negotiating with them is necessary but proceed with caution as the days of price squeezing are long gone.
In practice, what does it mean?
First, know who your suppliers are and how much you pay them locally, regionally, and globally. Ideally, this is not a “one-time initiative” request for your finance colleagues, but data that you always have available. As an example, an invoice automation solution can support this initiative while increasing efficiency and compliance.
A CFO from an Association of Chartered Certified Accountants (ACCA) roundtable event confirms by saying, "In the current complex environment of global pandemic combined with change in domestic and international policies, economy, and technology, finance and supply chain teams should work together to cope with changes!"
Second, digitize your buying practices and invest in a supplier innovation program. E-procurement digitization tools, especially those that need very little IT support, can immediately help with tactical purchases and transactional or predictable transactions. But why would you digitize human interaction? Isn’t that the key to a successful strategic sourcing program?
One way to innovate while still engaging on a personal level is to hold a “supplier innovation day” where all strategic suppliers are invited to share how they support their customers to achieve better quality and better pricing. Giving suppliers the opportunity to share best practices and connect with each other raises the bar among suppliers while keeping the human element intact.
Finally, the role of procurement needs to shift from being a re-active role to a pro-active role. Cutting costs is not enough. Digitizing purchasing tasks will streamline processes, strengthen your supplier base, and help mitigate supply chain disruption. According to the KPMG report “The Future of Procurement”, “Procurement needs a new perspective that is forward-looking and focused on aiming to maximize third-party relationships, innovation, integration, collaboration, and data-driven performance."
Data is king
Procurement teams must understand their spend and supplier data, because without it you have no leverage or visibility to make strategic decisions. If this data is not available from one single location, join efforts with your finance team to ensure long-term visibility. Once you have your spend data, if you decide to embark on an e-procurement implementation project, be wary of the “top-down” approach. Instead, look at how employees are working and how they interact with suppliers to understand their buying behaviors. For example, if you’re repeatedly receiving invoices from suppliers that are not in your ERP, why? What is causing people to deviate from the process?
How can Basware help?
Basware believes that procurement solutions should streamline procurement processes to drive user adoption, better manage spend, lower processing costs and increase supplier collaboration. Procurement with Basware is so simple and intuitive that employees use it not because they are forced to but because it’s the fastest and easiest way to get things that they need. To learn more, download our ebooks ”Maturing Procurement on you P2P Journey” – Part 1 and Part 2.