Value, supplier diversity, localization, and supply chain sustainability are not just stand-alone KPIs. They are part of a procurement ecosystem that creates positive economic, social, and environmental impacts.
Every month, Scanmarket holds Procurement Executive Networking (PEN) Lunches in which senior procurement leaders and CPOs engage in discussions on new trends, techniques, and best practices in the industry. They share their top concerns and challenges as well.
In our most recent meetings of 2021, supply chain fallout from the Coronavirus pandemic was still a dominating discussion point, but the conversation has shifted. Based on what we’re seeing in the market and hearing from procurement leaders at our PEN Lunches, strategic procurement leaders are putting a focus on value over cost, prioritizing supplier diversity and multi-sourcing approaches, and emphasizing supply chain sustainability.
In light of everything we learned (and are still learning) from 2020, the most successful procurement leaders take the time to identify the business’s overall strategy, then align that strategy with procurement key performance indicators (KPIs). This alignment helps increase overall profitability, but it also sets the business up for long-term success with customers, suppliers, employees, and the communities in which they operate.
Total Cost of Ownership: It’s Time to Prioritize Value Over Cost
Containing costs and spending the organization’s budget ethically is what procurement does. But looking at the cost alone without considering other variables can actually increase costs in the long run. Total cost of ownership (TCO) is now part of the conversation during the sourcing process. It’s the analysis of the purchase price of an asset as well as the costs of operation throughout the lifecycle of the product or service. This big-picture outlook includes quantifiable costs like acquisition and ownership of a product or service but also incorporates the costs associated with change management and process management like employee training and opportunity costs.
Integrating TCO into your strategic sourcing process will shorten sourcing cycle times by extracting more value from your supplier contracts, improving supplier innovation, and ensuring higher process efficiency. There are many different methods that organizations can use to create a TCO model, but it generally requires gathering data from various sources like supplier contracts and spend analytics software to make data-informed decisions.
A TCO analysis can be applied to anything from capital expenditures (e.g., lease equipment versus buying equipment) to talent management (e.g., contracting with outsourced contingent workers versus hiring full-time employees). In short, it helps the buying organization get the best value for the money invested, with an eye toward enhancing compliance, reducing disruptions, and mitigating risk. It can even help integrate sustainability into the procurement process (e.g., water or electricity savings).
Incorporate a Supplier Diversity Program into Your Existing Supplier Relationship Management Program
Another popular discussion topic at our PEN Lunches is supplier diversity programs. A diverse supplier is classified as a minority business enterprise, or a women-owned, veteran-owned, LGBT-owned, service-disabled/veteran-owned, or historically underutilized business. It’s important to note that supplier diversity is not the same thing as supply chain diversity (more on that below), although incorporating diverse suppliers in your supply chain management strategy will inherently diversify the supply chain.
A supplier diversity program is a prime area in which procurement can take the lead on a company’s commitment to diversity and inclusion initiatives. By requiring all suppliers to register on a dedicated portal, you can quickly capture supplier qualification data, including diversity certification documents. This provides enhanced visibility into the diverse supplier base and integrates seamlessly into existing supplier relationship management strategies.
Finding diverse suppliers and reporting on supplier diversity spend can be a difficult and manual process. Value is difficult to quantify, benchmarking data is lacking, and smaller suppliers don’t have the resources to promote their products and services. For these reasons, technology is the best way forward to display real-time supplier diversity data and to level the playing field so that smaller suppliers can compete with larger enterprises.
Supply Chain Diversification is a Risk Management Strategy
There have been many notable supply chain disruption events over the past 50 years, but the coronavirus pandemic exposed single sourcing as a unique national security threat when hospitals were unable to procure necessary items like N95 masks, personal protective equipment, and even ingredients to manufacture certain drugs. Companies with demand for products in multiple countries can benefit from moving production closer to the customer base to ramp up supply when a disruption strikes.
Maintaining a diverse pool of suppliers around the world helps companies absorb and recover more quickly from supply chain shocks. Introducing more suppliers into your business may increase some costs, but the benefits of being able to deliver products and materials outweigh the risks of slightly higher costs.
This video tells the story of how Emirates Flight Catering had just three days to adapt to disrupted supply chains that spanned the globe:
Additionally, multi-country sourcing and near-shoring also have the added benefit of introducing diversification and sustainability into the supply chain. For example, the coronavirus is still causing logistical nightmares at U.S. ports. Container ships from Asia are unable to unload their goods while American consumers and businesses wait weeks or months for items that used to come in days. A TCO analysis of a supplier relationship may reveal that working with smaller- and medium-sized enterprises (SMEs) and localized suppliers can generate significant savings while also reducing greenhouse gas emissions and minimizing disruptions.
Sustainable Supply Chains Deliver Long-Term Business Value
Transparent, sustainable supply chains are essential to root out child labor, human trafficking, unsafe and unequitable labor practices, and to monitor environmental impacts. Moreover, today’s consumers demand that companies take full responsibility at every level of the supply chain, which means visibility beyond Tier I suppliers is a strategic imperative.
Procurement can play a key role in meeting an organization’s Environmental, Social, and Governance (ESG) or Corporate Social Responsibility (CSR) objectives through a sustainable supply chain. This can be achieved by engaging with suppliers and partners to reduce operational waste, improve energy consumption, and manage supplier relationships for responsible sourcing methods
According to Gartner research, three in four organizations have formalized responsible sourcing programs as a means for driving supply chain sustainability. However, success can be impeded by such misconceptions as sustainable alternatives being more expensive or harder to source, and difficulty monitoring suppliers and requirements.
These misconceptions aren’t unfounded, but rather misguided. Alternatives to the status quo can be more expensive, time-consuming to source, and difficult to enforce if procurement teams are working from decentralized software systems that make aggregating and analyzing data an onerous process. This results in lost opportunities that leave money on the table and expose the organization to reputational, operational, and financial risks.
Picking the Right Procurement KPIs for Your Business
It’s important to note that value, diversity, localization, and supply chain sustainability don’t exist as stand-alone KPIs; they all work together holistically as part of a procurement ecosystem. This results in win-win partnerships and creates positive economic, social, and environmental impacts.