What impact is the “new normal” going to have on procurement
Many of us are tired of the term ‘new normal’. We are used to, yet tired of social distancing, many of us long to walk into a pub and order at the bar ‘just like we used to’, but deep down we know, nothing is ever going to be quite the same again.
Almost every area of business life has been affected, but in this article, I am going to focus on issues related to procurement and supply chain, looking mainly at ‘indirects’ – the goods and services which keep business running.
Unexpected consequences
The UK underwent a dramatic structural change in March 2020 – one which disrupted infrastructures which had evolved over decades. In a matter of days, millions of workers stopped travelling to their places of work and set up work stations in home offices, at kitchen tables, and in garden sheds. Elsewhere, the retail, hospitality, travel and personal service sectors effectively closed for months.
The impact on some supply chains was remarkable. Almost overnight, food service suppliers saw a huge drop in demand as hospitality venues closed and schools were only open for a small number of pupils. Left with few customers beyond healthcare, wholesalers such as Brakes tried to pivot and develop home delivery channels, although they lacked much of the physical infrastructure to make it efficient. Inevitably, prices became negotiable as the key players tried to defend their share of a much smaller market.
In other markets, demand held up, but there was a dramatic shift from one supply chain to another. As workers remained at home, they still used pens and Post-It notes, but it stopped being economic for the traditional stationery suppliers to deliver to the point of use. Step forward Amazon, for whom the pandemic delivered massive growth in B2B and B2C, creating disruption in multiple supply chains. Meantime suppliers working to a more traditional model have looked to deliver a ‘one stop shop’ by adding extra product categories such as cleaning and PPE.
Finally, there have been areas of increased demand, often accompanied by increased prices. While the impact on pricing of masks, aprons and gloves now appears inevitable, the impact on the cost of the humble cardboard box was much less predictable. Demand from e-commerce soared, while the pandemic also reduced the amount of cardboard available for recycling. Twelve months and several price rises later, there remain supply shortages, and many companies can no longer buy boxes on a ‘just in time’ basis, but have to commit to long term supply programmes.
Shortages coming here soon? So often American issues of today become our issues tomorrow, and the latest twist to this story of disruption is the Great American Chicken Shortage. The Washington Post reported recently that ‘Fried Chicken Craze is causing US to run low on Poultry’, and attributes it in part to increased demand for comfort food caused by the pandemic.
What are the strategies for today?
We have seen a range of different procurement responses to the pandemic, some of them tactical, but others which seem likely to represent the ‘new normal’.
Risk management and supply chain security have become key drivers. Many businesses identified the risks associated with single source supply when so much of Chinese manufacturing and shipping was disrupted at the start of the pandemic. Now, there appears to be the risk of disruption in India. It is more than time to interrogate the supply chains we do not own, but are business critical, instead of relying solely on third party suppliers to manage risk.
In other areas it is all about loyalty. For key products, we may be able to leverage long term supply relationships, where suppliers may look after a limited number of key customers. Communication is all-important, and better to be focussing on one or two relationships rather than fragmenting supply chains. Communication is vital when it comes to managing inventory across the supply chain. When the pandemic was at its height in China, Jaguar Land-Rover were shipping small but vital parts in suitcases on passenger flights. Now, where finance allows, there is a case for higher inventory levels than before, but communication is a key to sharing the costs with the supply chain, while avoiding the cost penalty associated with redundant stock.
Finally, there’s agility – a term which is often over-used and under-specified, but it is a key to success in this new season. In rapidly changing markets, it is essential to have the data to support procurement decisions, to work with data-rich partners, and to re-visit, re-visit, re-visit.
Three opportunities and three challenges going forward
Many of the procurement opportunities relate to the office environment, where demand has been low over the last 12 months.
Photocopiers are an example of a sector which has encountered a perfect storm – demand was already on a downward trend, and while there has been some recovery since ‘Lockdown 1’ the industry is reporting that volumes are still down by 20-30%, in particular where home-working is part of the new normal. It could be a great time to negotiate if you are confident of what you will require over the lifetime of a new contract.
Stationery and office furniture are other areas where there may be deals to be done as suppliers look to protect their share of a smaller market, while still searching for the markets of the future.
The challenges are in areas of increased demand, uncertain demand, or disrupted supply chains, including more costly and less reliable shipping from the Far East.
Laptops, printers and broadband, all now ‘home office essentials’ have seen extended lead times, with competition reduced by scarcity and discounts also becoming scarce. Bloomberg reported on the ‘Global Chip Crisis’ in April 2021 predicting pressure on supplies of routers, and other products may come under pressure too.
There has been increased demand for packaging supplies, in particular cardboard boxes, where there have been multiple price increases due to the scarcity of raw and recycled materials. For the short and medium term it would be prudent to secure supply with an existing partner, but by re-visiting packaging specifications you can achieve better long term value for money.
Finally, energy prices have risen consistently since the low point in ‘Lockdown 1’, but there is little consensus about the way forward. Will prices continue to rise, driven by a rebound in demand for future years, or has the market over-corrected? Wholesale gas prices for 2022 have already risen by around 20% this year, but with prices close to a 3 year high, and no clarity on where they will go next, a procurement strategy based on minimising risk looks to be the best approach.
In conclusion
We have all seen more change over the last 12 months than we could have predicted. We will all have our stories of how procurement or even buying for home consumption has been affected. As in so many areas, agility, seizing opportunities, keeping great communication and managing risk are some of the keys to navigating the choppy waters which lie ahead.
Originally posted 2021-05-06 11:39:37.
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