The disruption of global supply chains was seen as a short- to medium-term problem when the Corona pandemic struck home. Since the outbreak of the Ukraine war at the latest we now know things will never be the same again. But while larger companies can mobilize extensive forces to counter the crisis, medium-sized contenders are often not so fortunate. This makes initiating a few key measures at operational level all the more urgent. These are simple to implement, but vital for dealing more flexibly with the new uncertainty.
The procurement markets situation is increasingly threatening the existence of companies everywhere, prompting urgent discussions on how to mastermind optimum supply chains for the future. What is now emerging is replacement of global, lean but fragile supply chains by regional and thus more resilient ones. The decision to do this is both fundamental and strategic. It entails a great deal of organizational and financial effort - and this means it is simply not feasible for every company. The bottom line for a more resilient supply chain is you have to be able to "afford" one. If your financial performance is poor, additional burdens on working capital and structural costs are simply out of the question.
Strategic alignment of the supply chain is not all you need. Appropriate measures at operational level are also essential to cope better with ever-increasing uncertainties. Optimal supply chains can only be secured by combining excellent design and the right operational and tactical structures in the best way possible. This means if supply chain disruptions are not always consistently avoidable, they can at least always be detected at the earliest possible stage, leaving more room for successful manoeuvre and countermeasures.
All big companies with extensive resources on the procurement side are currently making massive efforts to counter the crisis. But this does not mean that they are all coming through it turbulence free. As a rule, however, corporate groups have the opportunity to at least cushion the impact and thus gain an advantage over the competition.
(Smaller) medium-sized companies usually lack resources for such efforts. This makes it all the more important for them to heed the following three recommendations at the operational level:
The transparency that should be a matter of course is unfortunately the exception rather than the rule in practice. Minimizing operational risk in procurement is a function of the available information - especially its timeliness and correctness. When supply chains and short-term availability of important products and raw materials are stable, deficits in this area have no direct impact on performance. Under the current conditions, however, complete transparency is essential. The more volatile prices and availability are, the more essential it is to know inventory levels, planned goods receipts and forecast goods consumption in detail. This is the only way to find alternative procurement channels or substitute products in good time in the event of an identifiable bottleneck, and it is also possible to adjust production planning in good time.
Rolling procurement planning
Static procurement planning is no longer in tune with the changed requirements of our time. Increasing uncertainty brings big fluctuations for incoming and outgoing goods and raw materials with the effect that stock levels and stock range can change quickly. This means rolling procurement planning is a must, because it is the key to a well-founded forecast of the procurement situation firmly based on current data.
Flexible forecasting systems
Forecasting systems for determining resource and goods requirements are mostly based on previously defined parameters such as production and sales volumes in a reference period. Additional parameters are also used, depending on the industry and business model. These extras can include the weather or traffic, for example in individual segments of B2C trade. The parameters must be adjusted on a regular basis due to the high uncertainty levels and the resulting changes in general conditions. A rigid forecasting model with fixed parameters is no longer appropriate.
Example from consulting practice
The example of a wholesale company clearly shows how the measures outlined were implemented in a medium-sized business with relatively lean procurement structures. Reorganization of procurement for over 30,000 articles was pending in this firm. The inventory was also set to be optimized in the same procedure with a focus on working capital and physical warehousing aspects. The suppliers were located both in Europe and abroad, but to a considerable extent also in Asia and North America. Massive delays occurred during the Corona pandemic, especially with Asian and North American suppliers. Although the existing ERP system provided a day-by-day overview of inventory levels, only selective approaches existed for forecasting sales and goods receipts, while the procurement process was very complex. This meant the inventory range resembled a black box. The result was that goods availability and capital commitment were suboptimally balanced.
Our task was to develop and implement a BI-based forecasting tool capable of identifying procurement risks at an early stage under the given volatile conditions. This was developed with the help of the tool. A process was implemented that enables employees to adjust the most important parameters such as comparison periods, changed delivery times, minimum order quantities, etc., so that the entire inventory and the forecast goods receipt can be evaluated on a daily basis. This has brought a significant contribution to improving transparency. The daily view based on current data made it possible to implement rolling procurement planning. As a further positive effect, the manual processing effort in procurement was significantly reduced - by 50 percent.
Costly duplicate structures could be avoided and a short-term development and implementation could be implemented. This was because the forecasting tool used is based on the existing ERP system and also uses existing interfaces. In addition, the forecasting parameters were individually adapted to the needs of the business model and the industry. The calculation logic underlying the tool is a transparent algorithm. This increases user acceptance and has supported rapid implementation in the organization. The reduction in manual processing effort associated with the tool also freed up resources for short-term responses to current challenges. All in all, the measures have helped to bring about a significant transparency increase for the supply chain, to identify developments earlier and to react quickly to risks.
In our projects, we experience time and again that "standard tools" are only used in a rudimentary way. This is because they only take company and industry specifics into account to a limited extent and meet with low acceptance among users. This situation makes solutions that create real added value for users all the more important.
What questions do you have about supply chain and risk minimization in procurement? Get in touch with us. We look forward to hearing from you.