2023 presents another year of supply chain volatility and inflationary pressure. Rising technology adoption combined with previous experience have made procurement professionals realize that a streamlined supply chain starts with procurement. Newer, emerging procurement trends are encouraging forward-facing procurement organizations to deploy their talent pool, capabilities and technology to make hay while the sun shines.
The terms sourcing and procurement are often mistaken to mean the same thing, so we’re going to clear up the difference before we dive into the procurement trends. Sourcing is the who, while procurement is the what, and how of a supply chain. Sourcing is the stage of determining and finalizing the suppliers through who procurement teams liaise with. Procurement takes place in cycles to ensure that goods can be supplied to warehouses, logistics centers or stores. It involves a needs analysis to establish the quantity and sufficiency of materials, supplies and services to avoid overstocking or added storage costs.
Let’s explore a few procurement trends that are growing in priority for 2023 and beyond. By the end of this post, you’ll be conversant in procurement-speak at your next all-hands meeting!
Emerging Trends in Procurement to Keep an Eye On
The reliance on spreadsheets and disparate paperwork is waning, and being replaced with procurement automation software that generates and maintains electronic records of vendor and supplier contracts, invoicing and billing. The flip has been partially influenced by the pandemic when offline contact was kept to the minimum, and conversations moved online. It made sense then, to digitize everything so that information is accessible across the supply chain to all the parties involved. In 2020, a PwC study found that digitized procurement stood at just 21%. Coming back to the present, this figure has shot up, with 77% of companies viewing process digitalization as a necessity rather than an afterthought. Procurement departments are setting aggressive targets to reach the digitalization figure of 72% by 2025. Considering the geographic distribution of an enterprise’s supply chain, businesses of all sizes are upping their reliance on digital procurement automation tools to retain their market share and free up their critical resources from outdated processes.
Data and analytics adoption
Paradoxically, supply chain experts are expected to work with accurate data against uncertainty. When there isn’t sufficient room for guess work, it is hardly a surprise why 3 out of 4 supply chain executives consider advanced analytics a crucial supply chain technology. Advanced analytics generate insights on procurement trends that can be analyzed and compared against historical movements. Supply chain managers and executives can use this information to make their moves with surgical precision so as to counteract revenue leaks and losses.
IoT and Blockchain Technology integration
IoT is playing a big role in efficiency enablement, and its applications in procurement are expected to shoot up beyond 2023. In a connected network, there’s clearer visibility of everything, from purchase deterrents to product spends and its subsequent consumption. Every stage of the supply chain can be monitored with real-time data, resulting in better decision-making.
IoT applications give a bird’s eye view of the supply chain, tracking the movements of goods to the extent of enabling eCommerce companies to act according to the supply and demand, and renegotiate vendor contracts.
Despite the term heavily associated with digital securities, blockchain technology is increasingly weaving security into the fabric of transactions. A few of the applications of blockchain will include
- Tamper proof smart contracts that self-verify and confirm that the terms set out are met.
- Approve payment releases to suppliers at the completion of a contract.
- Cover end-to-end multi-party transactions in the whole supply chain, with the terms of the transaction clear to all parties.
- Verify the authenticity of the goods received and its subsequent movement throughout the chain from source to delivery.
- Keep the distributed ledger accessible to all involved to establish a quicker and simpler due diligence.
- Enhance the visibility of purchase order management and rate supplier performance based on the supplier’s ability to provide and cater to your needs.
Demand fueling oversupply
Let’s quickly revisit the supply chain between the years 2021-present.
In 2021, supply receded in 4 areas- food, pharmaceuticals, Lithium and EV components and semiconductors. In 2022, capacity rebounded but demand took a hit. Consumers consequently tightened their belts and curbed spending in line with the inflated commodities prices. In 2023, the world has slid back to a global recession, causing an imbalance in demand and supply yet again. While consumer demand has dipped from 2022, suppliers are anticipating belated demand and are creating an inventory flood in response. Suppliers are overstocking their inventory to the pre-Covid times with the intention of guaranteeing product adequacy and timely delivery. Subsequently, a lot of the inventory is slow-moving, which companies are easing by running heavy discounts and clearance sales.
It is imperative for procurement professionals to keep an eye on the situation, as both overstock and understock can invite huge spending and cause the inventory to get out of hand. The best way forward is to use inventory forecasting within advanced inventory management systems to plan out the sales pipeline. Sellers and retailers can take action on product surpluses and release them strategically to maximize their sales potential.
Switching from linear to circular supply chains
A circular supply chain involves a company repurposing or recycling customer returns into new and refurbished products pushed into the selling queue. It aims to reduce waste and usage of raw materials,making it different from traditional linear supply chains where there’s a definite start and end(not to mention- a large pile up at the landfill). Circular supply chains move in a continuous format where products are fed back into it. It supports sustainability which aligns with the increase in environmentally-conscious consumers.
Considering the rising costs and tight supply of raw materials, it is a good business move to adopt the circular supply chain. This way, businesses would not have to worry about sourcing fresh raw materials and battling Yo-yoing prices.
Despite its benefits, however, there's a word of caution. Circular chains themselves are expensive to implement, creating a gap between the desire to adopt it, and feasibility. In 2021,an HBR study explained that supply chains are optimized to achieve two goals; i.e. performance (adding functional designs)and economic efficiency(sharing fixed costs across a wide distribution system). Recycling components and collecting them from various points would be seen as counteractive because of the magnitude of effort and groundwork coordination it would require. Moreover, it is difficult to recall sufficient parts back to manufacturing hubs from various depots that can justify the refurbishment process. The bottom line here being, that those businesses wishing to switch to circular supply chains should trade off specialization (and in turn performance) and operate under the assumption that their target consumer base would compromise in their expectations for product quality and durability.
The Evolution from CPO to CVO
In 2023, a chief procurement officer (CPO)’s role will be redefined to play a more strategic role rather than remain confined to a pure operational function. This shift in responsibilities to be discharged will shape the organization and steer it through challenging times. A procurement officer’s role will entail creating value through the adoption of digital transformation, sustainability and forming supply chain partnerships. With the pandemic exposing gaping holes in supply chain processes, the onus will be on CPOs to improve the supply chain’s resilience and agility by overseeing the migration to technological innovation. At a C-suite level, this technology adoption will cement the push for automation investments, thereby eliminating the overutilization of critical man hours on busywork. The shift will trickle down to labor with your human resources freed up to work on critical thinking, strategy and decision-making activities.
Net Zero Procurement
In a previous point, we talked about the switch to circular supply chains as a sustainability measure. Net zero procurement ensures that buyers get the best value for their purchase of the most environmentally-friendly goods and services. In a net-zero supply chain, suppliers are committed to reaching net-zero targets that support their buyer’s conscious choices. Net zero procurement scores a supplier’s sustainability performance with respect to climate change, and prioritizes those suppliers who are shifting toward decarbonized business models in the bid to reduce greenhouse emissions.
An Accenture study found that the supply chain contributes to ~60% of carbon emissions (though McKinsey places this at a higher percentage of 80%). A rise in awareness has resulted in demand being governed by ethics. Put simply, an increasing number of consumers are buying organic products and want to know how ‘organic’ it is, from the way products are sourced, to its packaging and subsequent mode of delivery. Due to this,a staggering 75% of procurement professionals are already digitizing their supply chains, with about 87% of executives voting in favor of using analytics on processes, equipment and products, and 78% firmly believing in AI-led demand forecasting.
2023 and beyond will see more companies offering sustainable delivery options at checkout to provide visibility into net-zero operational efforts. Multinational companies like Unilever, Nestle, The Aditya Birla Group, Vedanta and a few others are already taking up the cause to achieve net-zero sustainability by 2050, inspiring small and medium sized enterprises.
Nurturing supplier relationships
When all is said and done, a supply chain needs humans to move goods from point A to B. and cultivating good business relationships with suppliers is key to keeping the promises you made to your customers. There have been frequent incidents of delayed, wrong or undelivered parcels when suppliers switched contracts after the lock-in expired in favor of a competitor with whom they had a better rapport..
Even though suppliers operate outside your organization, your ability to deepen the relationship with them enables them to help your company grow. Because let’s face it; material and labor shortages, rising supply costs and fragmented logistics affect them as much as it does you. You should even diversify your suppliers to have a backup that holds you up during testing times. The new relationship framework should include;
- Performing a risk assessment and background check on suppliers to determine their reliability.
- Lowering your risk with alternative suppliers (going back to point 1).
- Determining and securing high-risk areas in your supply chain to stay proactive.
9. Reinforcing supply chain cybersecurity
A digitized supply chain comes with a laundry list of vulnerabilities. Gartner’s Press Release from last week states that in two years, 60% of supply chain organizations will use cybersecurity risk as a determinant in carrying out 3P transactions and engagements. Chief supply chain officers, or CSCOs, are going to upscale cybersecurity from this year onwards amid concerns of digital chain threats coming from customers and board members alike.
Third-party cybersecurity standards will be updated and an audit program will be created to enforce these standards. Several companies will invest more into cyber protection by setting up a dedicated office of staff or hiring a third party to maintain online security. The abundance and probability of attacks suggest that eCommerce businesses adopt an ISO 27001 certified AI-eCommerce software, which retains its technical robustness as you grow at-scale.
Enhancing the cybersecurity of a supply chain will require procurement officers to
Set the Minimum security baseline and revisit its upgradation periodically
Interestingly, in the bid for accelerated digitization, nearly 51% of data breaches in 2021 were traced back to companies adopting unverified 3P applications. Using a comprehensive Minimum Viable Secure Product checklist compiled by Google or Salesforce can verify the safety protocols of third-party software and outsourced services.
Perform internal risk analysis for the entire supply chain
It’s imperative to monitor the usage of third-party solutions across the supply chain as it expands. If the chain integrates offshore suppliers and distributors, then their software should be compatible with the systems you’re using due to the high volume of data being moved around. Internal risk assessments can ready the IT department to patch up hacks and get operations back on track without the risk of a technical disruption or failure.
Top-down knowledge sessions
Cybersecurity breaches are often caused from sheer ignorance or unawareness. It’s not a direct responsibility of a supply chain executive to conduct awareness sessions, but it is a good practice nevertheless to educate employees on cybersecurity improvement measures. And it starts from the C-suite trickling down to junior employees.
How will procurement change in the future?
McKinsey’s study released in March 2023 mentions that some categories will experience pricing surges and supply constraints, while other categories will see a price dip that needs to be closely watched. These swings will necessitate a category-level response as opposed to a one-size-fits-all procurement approach.
To design a supply chain that is fit for purpose by 2025, there are ten core actions that procurement leaders should take to combat supply chain disruptions. The actions that form a resilience toolbox are;
Identify risks using a 360°vulnerability assessment
Procurement professionals will need to decide on the next actions based on the risks associated with supply, suppliers and costs. Digital twins can help them in planning out scenarios based on their understanding of the Tier-n upstream value chain.
Using a resilience cockpit to gain real-time visibility
Several companies have already started using what KPMG terms a “resilience cockpit” to feed market data on customer demand and market pricing into internal data such as inventory. This can help procurement leaders keep a close eye on volatility levels.
Refresh category strategies to beat inflation
The category manager’s role is evolving and involving them increasingly in managing costs and risks related to manpower and logistics. Any new relationships being forged with suppliers will focus on sustainability and reducing emissions.
Enhance risk operating model
The risk models are now largely dependent on dashboards across sales, suppliers and supply and demand in order to predict how well resilience measures are working.
Optimize end-to-end operations
We can expect to see a collaboration of procurement and manufacturing and their related functions to respond to demand.
Save short, mid and long-term energy consumption
Companies are already a/b testing short-term energy savings by deploying self-sustaining energy models and technologies. This will extend to long-term consumption optimization in order to reshuffle the supply chain spend.
Plug Market Insights into Pricing Negotiations
Pricing negotiations become much more efficient after integrating the cost of goods sold (COGS) with pricing insights about the market and competitors.
Redefine portfolio and product design
A closer scrutiny of product designs can protect the procurement process from materials scarcities and rogue suppliers. The friction linked to these dependencies can be greatly reduced to push for qualification.
Coordinate responses through a control tower
A nerve center should be established comprising teams across various functions with the sole intent to protect the margin. This control tower would establish transparency, watch the market and risks to support decision-making.
Build new resilience capabilities.
The skills being hired for within procurement will evolve, calling for more data scientists and scrum masters who can use analytical tools to provide risk assessment and cost-benefit tradeoffs.
Supply chain leaders should investigate the key forces of change and plan for the impact of adopting automated technologies as a key procurement trend. The scale of adoption is going to be massive, and will influence the ratio of manpower to technology. Your human force should consequently be trained to master a plethora of tools including omnichannel eCommerce, blockchain transaction ledgers and IoT to be up for the challenge.
How will procurement change in the future?
4 ways in which the procurement landscape will change are
The increased adoption of AI and ML in procurement
Artificial Intelligence (AI) and machine learning will be leveraged by procurement professionals to make informed decisions concerning the suppliers to renew contracts with, pricing adjustments, product proliferation and categorization. This will greatly reduce the time and effort investments going into proposal reviews, contract management and managing supplier relationships.
Sustainability and social responsibility practices
Net-zero suppliers will be preferred for their ability to align themselves with corporate sustainability goals.
Increased digitization and automation
Procurement organizations will continue increasing their dependence on e-procurement, sourcing and e-invoicing platforms.
Usage of Business intelligence
Procurement professionals will rely on data visualization tools and dashboards to collect insights into historic performance, trends and set KPIs.
What is the future of supply chains 2025?
The future of supply chains in 2025 will include
- The widespread adoption of automation across the value chain.
- Global climate change and optimizing for resource shortages.
- Mass human migration.
- Shifts in consumer demand and consequent demographics.