How to tackle the top five procurement risks in 2021
In the last 12 months, procurement teams have evolved rapidly while adapting to the new landscape. As we head into 2021, here are the top five procurement risks that need to be front of mind for organizations – from the risk of supply chain disruption and changes in customer behavior, to the rise of remote working and a growing focus on Environmental, Social and Governance (ESG) considerations.
Managing supply chain risk
The COVID-19 crisis has made it clear how vulnerable supply chains can be if events take an unexpected turn, potentially leaving companies unable to source the goods and materials they need to do business. In 2021, companies will need to look more closely than ever at how to increase the resilience of their supply chains and reduce the risk of future disruption. While every company will have its own complexities and procurement challenges, the following actions may help address supply chain risk:
- Segment the supplier base to identify which suppliers are most essential to the business.
- Review existing suppliers to assess their financial stability.
- Monitor supplier performance to ensure suppliers are delivering the required quality and volume of goods.
- Diversify the supplier base – for example by dual-sourcing from suppliers in different countries. This can provide more flexibility if it becomes difficult to source goods from a particular supplier, or a particular geographical location.
Adapting to the ‘new normal’
Like other areas of the business, procurement teams have had to adapt rapidly to remote working arrangements during the crisis. This has brought numerous procurement issues, particularly around collaborating effectively with other parts of the business.
To address some of the procurement process risks in 2021, procurement teams will be looking to continue adapting to this new working environment, with many seeking to take advantage of collaboration tools and replace paper-based processes with more efficient electronic systems. Deloitte’s 2020 Chief Procurement Officer Flash Survey found that 35% of CPOs are “focusing their efforts around virtual working and making permanent shifts to work from home with increased virtual collaboration.”
At the same time, procurement teams will need to work on becoming more agile and flexible as companies adapt to the demands of this changing environment. The Deloitte survey found that 18% of respondents regretted not accelerating digitization fast enough. So whether it’s simplifying decision-making, speeding up the onboarding process for new suppliers or enhancing visibility and analytics capabilities, adaptation will be the name of the game.
Supplier collaboration is likely to be another important topic for procurement teams in the year ahead. Indeed, research by Procurement Leaders and Bain & Company found that 54% of CPOs plan to increase supplier collaboration in 2021.
Supplier collaboration can take different forms. For some companies, it means working closely with suppliers to develop innovative products. For others, it might mean collaborating on initiatives such as planning and forecasting, or working together on joint contingency plans.
Either way, this approach may mean something of a mindset change for companies that have traditionally focused on cost competition. But the benefits can be considerable: according to McKinsey research, companies with advanced supplier collaboration capabilities demonstrate higher growth, lower operating costs and greater profitability than their peers. As 2021 unfolds, supplier collaboration is likely to play an important role in helping buyers and suppliers weather future procurement challenges.
The COVID-19 crisis has not prevented companies from placing increasing importance on ESG and sustainability. From adopting ethical labor practices to reducing the environmental and social impact of operations, companies are looking at this topic more closely than ever before. And those that fail to act may find themselves at risk of reputational damage.
Where procurement is concerned, there are a number of ways to embrace sustainability. This might mean assessing the environmental impact of individual suppliers, implementing a supplier code of conduct focusing on ESG considerations, and/or asking companies to operate in a more sustainable way. Companies may also include sustainability factors in the supplier selection process – and even terminate relationships with suppliers that fall short of the required standards.
Further, companies are increasingly looking at ways of using supply chain finance to build more sustainable supply chains. Typically companies do this by rating their suppliers against chosen sustainability criteria. High-scoring suppliers can then be rewarded by being offered supply chain finance at a more favorable interest rate, thereby incentivizing suppliers to adopt more sustainable practices.
Supporting suppliers through cash flow challenges
In times of crisis, maximizing cash flow is a major priority for organizations. For many companies, the evolving situation has placed considerable pressure on cash flow, from changes in customer behavior to a rise in late payment by companies seeking to conserve their cash. Last year, Taulia’s COVID-19 supplier survey found that 56% of companies had seen a decrease in orders during the crisis – and 43% had experienced an increase in late payments.
For many suppliers, these pressures can pose an existential threat. According to J.P. Morgan, the median small business only has 27 days of cash in reserve – which gives little scope for surviving a cash flow drought. And of course, if a supplier is struggling to survive, or goes out of business, the knock-on effect for its customers can be considerable.
As such, supporting suppliers through the crisis should be an important goal for companies in 2021. Some large businesses may be in a position to pay their small suppliers early, or even in advance. For many others, a more attractive option is to offer suppliers access to early payments via a supply chain finance program. In this way, buyers can support their suppliers through cash flow challenges – and thereby increase the resilience of their supply chains – without adversely affecting their own working capital.
In conclusion, 2021 is likely to bring plenty of procurement challenges – but by supporting suppliers, managing procurement risks and embracing the opportunities brought by new technology, there is much that companies can do to position themselves for success in the year ahead.