U.S. manufacturing has been on a bumpy ride for the last five months: The Institute for Supply Management (ISM) has reported industry contraction since October 2015. The pace of contraction slowed a bit in February and is inching closer to a level of 50.0, the demarcation line between growth and contraction on the ISM index.
But what looked like optimism at the end of 2015 has seemed to fade. Americas manufacturers are less optimistic this year than their foreign counterparts, according to a report by Deloitte: 28 percent of Americas chief procurement officer (CPOs) are reporting worse financial prospects this year than last. Sixty-three percent reported an increase in financial and economic uncertainty compared with a year ago.
Global trends -- weak supply markets as a result of low inflation, soft currencies in the Eurozone and U.S., and a lack of demand for credit — have prompted a renewed focus on risk management among procurement executives, according to Deloitte. Financial instability, increasing levels of outsourcing, and the demand for goods and services from emergent markets have also contributed to anxiety. As a result, aggressive cost demand and risk protection dominated most procurement strategies in the past year.
The outlook for the rest of 2016 isn’t much different. In “Procurement: at a digital tipping point?” Deloitte found the leading priority for CPOs is cutting costs, which is consistent with similar studies conducted within the past 12 months. “It’s clear … that manufacturers expect to face major supply chain challenges in 2016 stemming from external factors beyond their control,” said Greg Kefer, VP for corporate marketing at GT Nexus, which conducted research earlier in the year. “The data suggests their execution roadmap may be misguided, being focused more on cost cutting, for example, than more mission-critical things like having a senior supply chain leader in place.” About two years ago the supply chain was focused on achieving agility and flexibility. Now, as revenue expectations are modest at best, procurement managers are looking inward to improve their companies’ bottom line. Although digital technology can provide opportunities for cost-cutting, CPOs are reluctant to make the investment. Only 40 percent of the Deloitte base has a clear digital strategy in place; 60 percent do not. Deloitte’s survey of manufacturing CPOs found:
- They are more uncertain about economic conditions than their peers.
- They are looking to focus much more heavily on supplier collaboration than they were last year.
- Seven out of 10 are reporting an increased focus on cost cutting.
- Manufacturing CPOs are twice as likely to sit at the board level compared to their peers.
- These CPOs are much more likely to have a very good relationship with their CEO.
- Manufacturing CPOs play a more active role in decision making and are better informed of changing business requirements as compared to peers in other industries.
- These CPOs are less likely to be investing in digital technologies over the next 12 months, including cloud solutions and analytics.
- These CPOs have shifted their focus away from attracting new talent in a difficult market toward retaining their existing procurement teams.
- Almost two-thirds identify training their teams on technical procurement skills as the priority rather than looking for new talent
Americas CPOs have been able to take advantage of low gas, oil and commodity prices in the past year; 6 out of 10 of the Deloitte respondents said they exceeded their savings target. At the same time, these CPOs are more likely to place a focus on cost when selecting new technologies. Cost is the number one priority over ease of user adoption and integration and performance; their global counterparts ranked cost as a second priority.
Procurement is effectively positioned to join the digital revolution, according to Deloitte. It can offer a radically different value proposition to the organization — one that removes the traditional process-led bottleneck and the need to allocate significant human resource to still-essential transactional tasks. While embracing technology will not immediately or even completely resolve these challenges it does present a significant opportunity for CPOs to leverage lessons from elsewhere and to tailor their application to the supply-side dynamic of procurement. Some CPOs are already grasping this opportunity, the report concludes, but many are not.