When prices shot up and budgets shrank, who was expected to pull off the impossible?
When things return to normal, who will begin another round of preparing for the next crisis?
Aval Sethi, Business Leader & Procurement Influencer took us through how the efforts of procurement carry an organisation through terrible times, in a free and frank interview by Dr Mrigank Warrier.
Q) How has the pandemic influenced the perception of the role of procurement?
A: In all global crisis situations, the first impact on businesses has been on business continuity; it’s always procurement that ensures that the business is adequately supported. Unfortunately, during normal times, the value that procurement should get is always down, since everything is running perfectly; the operations side tends to forget that procurement plays a very important role, which gets highlighted during a crisis. That’s when everyone realises that procurement is the backbone of a business.
Q) How has procurement responded to the pandemic?
A: Based on their response to Covid19, there are three categories of companies. Some companies were better prepared than others to mitigate the impact of the pandemic. There were some who could manage to respond and support the business. The third set were in bad shape and scrambled to respond.
The first category consists of either global agencies or large entities which have developed and implemented a very advanced supply chain ecosystem and business continuity strategies. Their supply chain was not dependent on a single geography. They multi-sourced supplies and services, and there was no dependence on a single supplier. They had built a portfolio of suppliers, and had an inventory strategy in place. Therefore, when the supply chain got disrupted, they had enough buffer stock to sustain for a month or two, until the normal supply chain kicked in.
The second set could respond only because they had built strong relationships with their vendors and key suppliers, which they leveraged to pressure vendors to support their organisations. Vendors went out of their way to do this. Suppliers too had foreseen that a disruption was coming, and they too had stocked up to be able to cater to some of these organisations.
The third set had no clue how to respond; their only focus over the years has been cost reduction. They pressured suppliers to keep reducing costs, changed suppliers for even minimal cost-saving, without caring about the supplier’s background. They sourced only locally, did not find alternate sources, didn’t know the extended supply network. When this failed, all hell broke loose.
Q) How does procurement need to adapt to respond to crises like this?
A: The SRM program is traditionally about being procurement-led, and managing the supplier. It relies on short-term performance metrics, and is unidirectional. Normally, the company tells the supplier what it wants, how it needs to be done, its expectations, and the supplier will only respond.
This pandemic has taught us that we need to build a collaborative working environment with the supplier which fosters innovation, prompting the supplier to come up with ideas and bring solutions, making them partners in building business strategy. It becomes a multi-directional approach, and becomes something you do together with the supplier, building trust and transparency.
Q) Why were some procurement professionals better placed to respond to a financial crisis?
A: In India, we have an ‘it won’t happen to me’ attitude. But mature procurement staff have always looked at the future, examining the market for new products. Apart from sourcing what is needed at the moment, I am always meeting suppliers and testing new products. This has led us to find that there were already vendors who were supplying face-masks, and these vendors were already known to us. Those who hadn’t done this were exploited by predatory vendors when there was an emergency, and had to pay a premium.
Q) How has the economic downturn affected procurement, and how has it responded?
A: Cash availability has reduced drastically, because business has gone down in terms of volume. We have to be conscious about not being wasteful in our spending. Earlier, people would order and stock inventory. With a lot of people working from home, we have to look at optimum usage patterns. Do we still need to order the standard quantities we were ordering earlier, or can this be reduced? How much do you really want to stock? How much buffer do you need?
Vendor-partners also understand that everyone is going through a tough time. They have reduced their margins to build long-term relationships with us. For example, in maintenance contracts for elevators, a preventive maintenance schedule is in place; but with most buildings shut down and elevators not used, does a fixed fee still need to be charged? Can a monthly check be replaced with a quarterly check? There is no single solution.
Q) Do you think the prime position procurement has now achieved is permanent?
A: We have selective amnesia. At the moment everyone is running after procurement. But the moment the crisis is over, we may be back to the usual.
In most organisations, procurement reports to finance, which only looks at cost. This frustrates the procurement team; cost cannot be the only criteria. Even the first category of companies, which in spite of upheavals did not suffer disruption, will go back to business as usual.