Trends and Technology
Procurement Strategies: What Smart CPOs Are Doing Now
18 December 2022 |
The C2FO Team
Procurement teams continue to be faced with business challenges: inflation, rising labor costs, supply chain breakdowns — and they’re just a few of the seemingly uncontrollable forces uniting to hold you back.
But never bet against the resourcefulness of a professional procurement team. With foresight and creativity, it’s possible to manage the worst of these threats and even set your enterprise up for larger wins in the near future.
“Procurement teams find themselves up against another challenging year,” said Kristyn Baker, C2FO’s vice president of procurement and sourcing strategy. “On top of everything that COVID brought with it, now there is inflation to top it off.
“But given the challenges that have been thrown at procurement teams since early 2020, if nothing else, they have learned to become even more agile and adept at contingency planning. Just like the last two years, they’ll get through this and come out even better on the other side.”
Here are the keys to surviving — and thriving — in procurement this year.
Treat suppliers well
If the last year or two have taught us anything, it’s that supply chains can easily snap when enough pressure is applied in just a few places. That’s why it’s essential for procurement professionals to work closely with suppliers by providing support and eliminating unnecessary obstacles.
An excellent place to start is by looking at payment terms. Forward-thinking procurement teams will accelerate payment to their suppliers, which in turn will offer a discount — a win for buyers that are trying to offset rising costs and manage their working capital.
In this inflationary environment, suppliers must convert their invoices to cash as quickly as possible so that they can hold on to their buying power. Early payments allow suppliers quicker access to cash, enabling them to deal with increased demand, rising commodity prices and a myriad of other pressures while reducing the cost of that capital.
Early payment also means that suppliers don’t need expensive finance tools, such as credit risk insurance. They can finance early payment discounts on their own, letting both enterprise buyers and their suppliers win.
Having a lower-cost source of financing is a huge need for many suppliers. According to our recent 2022 Working Capital Survey, about 45% of respondents said higher interest rates was the biggest obstacle for getting more capital.
Sustainability isn’t just nice to have — it’s essential
Environmentally and socially responsible practices have gone from being important to absolutely necessary. What was once going the extra mile is now table stakes as customers, regulators and other stakeholders hold companies accountable for their impact.
One of the biggest game changers has been the impact of ESG (environmental, social and governance) ratings on access to capital. More credit rating agencies are looking at companies’ ESG performance, which can impact their cost of borrowing.
Meanwhile, a growing number of ESG investment funds are giving priority to companies that adopt higher standards. According to Bloomberg Intelligence, global ESG assets could grow to $50 trillion by 2025, representing more than a third of all assets under management.
There are other benefits, of course. Focusing on ESG issues — and using them to guide procurement decisions — can make your supply chain and business more robust:
- Customers actively seek out (and pay for) products produced in an environmentally and socially responsible manner. Taking these concerns seriously can give an enterprise an essential advantage in the marketplace. McKinsey has found that up to 70% of consumers are willing to pay up to 5% more for green products in multiple categories if those products perform as well as a non-green product.
- Suppliers may be more resistant to price shocks and climate-related disruptions if they embrace green energy and design. For example, Saint-Gobain Group, a French manufacturer of glass and other construction materials, boosted water efficiency at its Indian plant and created two reservoirs to hold rainwater. Those changes will increase its ability to continue operating during droughts.
- Want to know if a supplier is likely to provide reliable service? According to Dun & Bradstreet, recent research suggests that suppliers with a strong ESG track record are more likely to be good business partners.
Companies that ignore ESG could also find themselves cut out of opportunities with government agencies and corporations that mandate socially and environmentally responsible practices among their suppliers. (An excellent example of a company that excels at diversity and inclusion is Walmart.)
More companies could be held accountable for ESG impacts across their supply chain, not just within the companies themselves. For example, Germany’s Supply Chain Due Diligence Act could fine the country’s largest companies if they fail to take appropriate measures to prevent environmental and human rights abuses in their supply chain. It will take effect in 2023.
While new regulations are important, positive incentives may be even more effective.
One of the most exciting innovations is enterprises offering access to better, less expensive financing to suppliers that hit ESG targets — for example, improving their carbon footprint, which also helps buyers meet their goals for Scope 3 carbon reduction.
These types of incentives recognise that it costs suppliers to adapt their operations, and they show that enterprises are willing to offer meaningful help.
Smart procurement teams not only are asking suppliers to report on their ESG performance but also are supporting them in making the transition. As one C2FO customer put it, “Think like a doctor, not the police,” said Colin Sharp, C2FO’s executive vice president for international.
Embrace digital transformation
Nobody gets excited about revamping their procurement processes, especially if it means learning a whole new stack of technology. But maybe they should.
According to a 2020-2021 PwC digital procurement survey of EMEA companies, 79% of purchasing departments say they’ve become more efficient and recorded higher internal client satisfaction after adopting a new digital solution.
Digital transformation was the No. 3 strategic priority for purchasing departments in the PwC survey, behind cost-cutting and supplier management. Still, it’s been a consistent priority over the years. The largest companies are expected to make significant investments in transformation over the next two years.
The most common use cases include implementing source-to-contract and procure-to-pay platforms, alongside increased use of analytics to identify problems and opportunities.
But more companies are starting to experiment with more advanced capabilities, such as supplier risk management, where a platform identifies high-risk suppliers and suggests alternatives.
Be ready to fight for excellent procurement talent – and be reasonable
Procurement is vulnerable to the same pressures that every department and company faces right now: Your best and brightest people are probably looking for their next career opportunity. According to a recent Gartner survey, only 50% of procurement and supply chain employees under 40 have a “high intent” to stay in their current job.
Unless you’re unimaginably lucky, you’re probably going to spend time recruiting new team members this year.
To compete, procurement teams need to rethink their job descriptions. Too many companies want applicants who can do everything and have been gainfully employed doing everything for at least five years. In today’s job market, that’s not realistic. Identify the core competencies for a role, and invest in training for everything else.
Gartner recommends that procurement teams spend as much time on retention as recruitment. The best candidates for your team are probably the people currently on your team.
Think about how you can make a case for your people to stay in their jobs.
- Are they being adequately compensated?
- Are their jobs designed to play to their strengths and interests?
- Are you having active conversations about their growth and development?
The bottom line
The secrets to thriving during challenging times are not much of a mystery. They’re simply a set of best practices that many procurement teams already follow.
Investing in these strategies — a collaborative supplier network, ESG-influenced strategy, digital transformation, people-first recruiting and retention — will not only help you navigate this year, they’ll put your team in position for greater successes this year and into the future.
This article originally published March 2022, and was updated December 2022.