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On the front foot: Procurement’s response to economic fears

Guy Strafford
Aug 25, 2015 5:51:00 PM

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On the front foot: Procurement's response to economic fears

For many businesses around the world, it has become suddenly apparent how close the connections between European / US and Asian economies are - with the suddenly tumultuous Chinese economy having a global impact. An impact that will no doubt continue to swing wildly over the coming weeks, even months.

The Chinese government devalued its economy last week for the third time this month. Global markets that were already battling against the gusts from the Chinese market were hit full force with an economic storm. In London, almost £74bn was wiped off the value of the FTSE 100 index, while the US stock market suffered its biggest sell-off in four years. There were also reports released of a significant slowdown in manufacturing within China with deterioration in the sector leading to the worst levels since March 2009.

Despite the Chinese government’s attempt to intervene, with one panicked policy after another, the butterfly effect of this critical market destabilising has already been felt in Europe and the US.

Whilst the world appears to be in panic mode at the moment, there is a major opportunity for procurement to connect with the executive board around the topic of supplier management.

What does the market activity in China have to do with procurement?

As a glass-half-full person, I believe that the Chinese market shakeup offers procurement a great opportunity to start engaging with the business on topics beyond the traditional stereotype of savings. Here's how:

  • Risk and resilience: Two critical board issues that have now landed squarely in procurement’s court. Whilst you may know which of your tier one suppliers are at risk, do you really know how many of your tier three and beyond suppliers are? Further, do you know the impact that problems with these suppliers will have on your business, or your other suppliers’ businesses? How easily can you find a new local supplier before your competitors, or before your customers become unhappy?
  • Monitoring and contingency planning: Effective monitoring and contingency planning that looks at the entire supply network feeding into your business is a necessity for businesses, both in turbulent markets and on a day-to-day basis. The annual financial health check is no longer enough, businesses need a finger on the pulse of their supply base to gauge individual performance and collectively gain a view of market sentiment. If businesses were closely monitoring sentiment amongst all suppliers in China, could they have foreseen a crash coming?
  • Business performance: In a time of crisis, the ability to drive greater efficiencies, better innovation, increased productivity and improved responsiveness from your suppliers is more beneficial for overall business performance, than a short term cost reduction. Those companies who cut costs now, are likely to find it more difficult to scale upward when the market stabilises.
We’ve seen a conscious effort by both procurement and business leaders to develop procurement beyond the traditional reputation of that of “the savings guys”. But, given the events of the past few weeks, we should expect there will be several conversations around “bolstering the bottom-line” as nervous boards seek the security of cash.

For the moment, the best thing to do is to get on the front foot. At the time of writing, there are already reports suggesting that markets are bouncing back, and that the effects may not be as bad as first feared. But this should serve as a stark warning to global businesses, and in turn their procurement functions that business is now done in a global economy, and requires a global perspective.

Procurement teams should be seeking to understand how their business is spending money, so that if there is a sudden need for a cash injection, if a market crash calls for contracts to be reworked or even if service levels need to be amended – they are on top of this. Procurement should be engaging with the wider business, finding out what the real challenges are likely to be in the event of any further economic turbulence and preparing strategies to mitigate these. It should be building strategies to help the organisation it serves become the investment vehicle of choice for worried investors looking to put their investments somewhere safe.

In the meantime we suggest that procurement teams keep a close eye on the markets and plan some (probably long overdue) reviews of tier two and beyond suppliers around the world.

Learn more about the impact of corporate virtualisation on your procurement and supply chain functions.

As always, if you have any thoughts or questions, please add them to the comment box below. Corporate Virtualization

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