Risk Management Part 2: Category-specific and regional perspectives
Part 2 of our risk management series focuses on the impact of Covid-19 on specific regions and categories such as business travel and marketing.
We kick off with Bill Young who offers a European perspective on what’s been discovered:
- Robustness vs resilience
We used to talk a lot about robustness, referring to how something could withstand pressure and shocks. The stronger it is, the more it remains the same; until it breaks, perhaps catastrophically. We now find that resilience is more valuable: it is the ability to adapt quickly, develop workarounds, find alternative routes, or even alternative starting points and destinations. Food distribution proved to be remarkably resilient during the pandemic: there were few choke points.
- Procurement is a part of Supply Chain; not the other way round, nor something separate
Supply chains were once any series of connected points: Procurement was once a boundary layer activity, where outside meets in, and where important deals were done. The outside-to-in perimeter deal is now just one transition in a supply chain which, to be meaningful, is end-to-end. The ‘perimeter deal’ cannot stand on its own, and Procurement has to understand the supply chain context. Increasingly, it finds itself subservient to Supply Chain, organisationally.
- Buying ‘stuff’ quickly may be appreciated but is not an executive competency
Obtaining face masks in an emergency is a demonstration of ‘gofer’ skills. It’s important, yes; like security and distribution. It is not a reason for having the CEO’s ear. Perhaps the opposite: it confirms Procurement’s place as a silent operator performing essential tasks with little authority or thanks.
- The only effective pre-existing contingency plans included the word ‘pandemic’
When lockdown hit and employees had to stay at home, Pharma companies already had a plan. Their culture is conditioned by knowledge of the sequence of events and it was obvious to them that (a) it would happen sometime, and (b) when it did, the workforce would be stuck at home. Many others were caught out.
Geoff Allwright gives us a perspective for business travel and meetings in 2021 and beyond:
It’s no exaggeration to say that Covid-19 has devasted the business travel and meetings categories. Airlines, hotels, ground transport and event venues have all been hit very hard; no supplier in this area has escaped damage. Airlines have slashed capacity, hotels have mothballed their facilities and trains are nearly deserted.
We have learnt that the old way is no longer valid, and that new buying strategies need to be employed for 2021 and beyond. Will business travellers have the desire or requirement to journey to a meeting? Perhaps buyers and suppliers will need to be more agile, ready to change tack as the coming year evolves. It seems that more collaboration across the whole market will help the sector to recover. Buyers will need to work hard on communicating about the ‘new world of travel’; in particular, emphasising traveller safety to stakeholders, budget holders and those travelling.
Teng Hong Lim offers an Asia perspective:
Several lessons have been learnt by Procurement in Asia. My recommendations for future strategies are:
- Conduct early and effective planning of resources
- Explore solutions with local suppliers in the event of re-occurrence of lockdown impacting global suppliers
- Renegotiate contract terms to ensure win-win for client and suppliers
- Explore opportunities to tap into technology and innovations that reduce labour-intensive tasks
Develop a plan to ensure the company is well-positioned to deliver more projects when there is a positive spike in the economy, such as when the Covid-19 vaccine is available. This may include renewed health and safety plans, supplier re-categorisation, adoption of new technology and/or method of delivery, together with developing local suppliers to support business continuity and sustainability.
Don Xu presents a perspective from China:
Risk has always been ignored to a certain extent in procurement life – people never imaged a global pandemic of this scope would happen, so cost-saving has always been more important.
Procurement has a responsibility for risk control, whether it’s caused by a pandemic, or by a quality issue, by payment, etc. However, it is now clear that risk control has been ignored or been taken for granted. The scope of the impact is beyond our control, so all we have to face the consequences …
But we have a short memory, like a fish. In a year or two, we will be back to focusing on cost savings ... at least until another wave hits!
Brian Cunningham offers a US perspective:
Risk management has long been an integral component of Procurement’s supplier due diligence, risk assessment and qualification processes. The Covid-19 pandemic has had the impact of elevating risk to a dramatically higher position on the supplier evaluation scale. Continuity of supply and business, geographic location of the supply base, and crisis management contingency plans have effectively replaced or been equated with, more traditional risk assessment criteria.
The elevated risk management process is optimised by the rigid rationalisation, segmentation, and classification of suppliers throughout the entire supply chain from primary providers to all tiered sub-contractors. Continuous risk profiling using consistent, category-specific indicators has become standard and force majeure risk is now clearly defined and comprehensive.
De-risking should not just be one-dimensional toward suppliers who will remember how they were treated during volatile, vulnerable times; SRM and customer-of-choice practices will prove more essential than ever.
2020 has highlighted that our limited procurement resources must be put to more efficient use. Category managers are still getting sucked into too much non-value-added work. The resulting administrative waste would have lean consultants crawling all over it if we were a manufacturing plant.
James Meads provides a perspective from Eastern Europe:
The increasing trend for more regulatory and compliance functions is only going to increase the burden on front-line procurement personnel.
The solution can be summarised in 3 words: eliminate, automate and delegate.
Much of what the typical procurement category manager touches is not a productive use of their time, when measured as their effective hourly rate (EHR) as employees. EHR is your annual salary, divided by the number of hours you work per year, so, for example: 70,000 / 225 / 8 = 38.88 per hour.
So to be more efficient, senior executives in Procurement should:
- Question whether the process is really necessary? If not, get rid of it;
- Or find a ProcureTech solution that automates or streamlines the process;
- Failing this, recruit more junior members within the team to perform essential administrative and operational tasks.
To spend time on what’s important, and to improve how we market ourselves to the wider business and the C-Suite, Procurement MUST elevate our profession’s value. We can only succeed here if our departmental budget, most of which comprises the wage bill, can be put to work more effectively.
Tina Fegent provides a Marketing Procurement perspective:
Crises such as the coronavirus pandemic can have the potential to hurt a brand's reputation, therefore it is critical that marketers and their counterparts in Marketing Procurement actively manage any risk and lead the company's response and recovery plan. This can include:
- Having a risk management strategy in place. This is not something that you often hear about in terms of marketing but Mastercard appointed a Risk Management Officer 2 years ago. Their Chief Marketing and Communications officer, Raja Rajamannar, believes that having those “building blocks” in place meant it could shift strategy much faster than other businesses when coronavirus emerged.
- Carry on with your marketing investment levels as other brands pull back on their advertising. It is good to keep spending as you can get more exposure. Mark Ritson a very vocal Professor of Marketing says ““The brands that keep a marketing budget see a payback in market share post-recession”
- Working with a smaller number of key agencies, making sure that they are robust as well as them helping drive the right brand message
- Focusing on those business-critical marketing costs (e.g. why pay to advertise your retail outlets if they are shut?), and proactively reducing expenditure or deferring such marketing costs in the short term
- It is also good to see this current period of time as an opportunity to improve resilience and market relevance post-pandemic. So look at longer-term customer trends that existed before Covid-19 and consider if these will accelerate or not?
Graham Crawshaw offers a CASME perspective:
CASME has identified that the procurement community is focusing on five main areas of risk:
- Financial stability of critical and high spend suppliers
- Issues that have reputational damage concerns
- Breaches of GDPR and other data regulations
- Supply chain certainly
- Bribery and corruption.
The challenge for Procurement is the lack of systems in place to help mitigate these risks. Spreadsheets are the primary tool being used by 75% of CASME’s members. Other dedicated systems are still in their infancy and the major enterprise resource planning (ERP) systems frustrate Procurement.
Procurement also struggles with the broad scope of risk management. More risks are being identified by the business as being important to track and monitor.
CASME's benchmarking identified the following:
Engagement with stakeholders and the business is a starting point to develop specific risk strategies. However, at some point tools will be required to provide support.
Karl McEneaney conveys a UK perspective:
Certain markets, such as those reliant on hardware, components, materials or resources, will continue to be disrupted as restricted access to sub-markets and incremental bottleneck conditions are caused by fluctuating pandemic conditions and Brexit. Procurement should reassess the conditions of category markets using the Kraljic matrix or something similar, to adjust category and sourcing strategies appropriately by focusing on surety of supply.
Supplier contracts, performance and relationships may be challenged by the effects of Covid-19 and Brexit, which include reduced access to skills and lack of travel. In addition to ensuring proactive business continuity planning (BCP) and frequent risk assessments, Procurement should map the supply chain to identify underlying risks which may not otherwise be identified.
Procurement’s stakeholders have had their strategies, priorities and plans disrupted during 2020, and this is likely to continue in 2021. Flexibility is required, to adjust Procurement’s strategies, plans and objectives so that they maintain alignment with those of stakeholders, and acceptance that, at times, stakeholder teams may also be impacted by the unusual conditions. Above all, sharing empathy and personalising support will help maintain key relationships.
While the business environment continues to be volatile, Procurement should place greater emphasis on conducting due diligence activities (financial, economic and political) to proactively identify new and changed risks at an even earlier stage.