Supply chain executives have always had to factor in the impacts of geography and logistics, weather conditions, governments and regulation on their bottom-line marginal returns. In today’s landscape of economic uncertainty, cross-functional teams of supply chain, procurement, and finance will need to weigh these dynamics when evaluating current and future sourcing scenarios. In these choppy waters of economic volatility, procurement specialists—if armed with the right technology—will have a newfound ability to align and even influence internal stakeholders and C-suite executives with their strategic decision-making.
In the year ahead, procurement managers may require significant expertise in geopolitical risk to navigate the impact of international events on global supply chains. Historically, the U.S. has been a stabilizing influence, but recent announcements of proposed tariffs and revised multinational trade deals, coupled with constant adjustments, are making the operational calculus by supply chain professionals both more complex and constantly iterative. Supply planners will have to analyze and make recommendations to accommodate new rules.
Consider the impact on global supply chains of events taking place at the close of 2018. December was marked by the U.S. stock market’s roller-coaster ride , the Federal Reserve’s interest rate hike (with officials promising more in 2019), and a 90-day truce on retaliatory tariffs between the U.S. and China at the Buenos Aires G20 summit—immediately followed by politicians returning to dire pronouncements and trade war threats. Keep in mind that these gathering economic headwinds followed on the heels of the International Monetary Fund’s October (Q3) report and the Federal Reserve Board of Governors’ data citing a slowdown in the global economy in 2019. If that wasn’t enough to fill the dashboard of the savvy procurement officer with warnings, red alerts, and downward-trending arrows, there were numerous television appearances by CEOs in the fall predicting an economic recession by the end of 2019.
The importance of visibility
If recessionary conditions arrive, one should expect to hear the same shortsighted proposals frequently made during past economic contractions: to cut back capital investments and staffing of already lean procurement teams. Certainly, external pressure on supply and revenues will have a cascading effect. But the reach and effectiveness of digital sourcing systems have reached a tipping point. Organizations might have once had a five-to-seven-year window to integrate artificial intelligence (AI)-enabled sourcing in the enterprise for competitive advantage. However, the organization that today can effectively manage a higher percentage of its supplier spend, deploy greater visibility to uncover supply chain opportunities, and respond with rapid action to drive improvement in marginal spending will be the one most likely to emerge unscathed from 2019’s unusual level of market volatility.
Here are additional insights that will examine the intersection of technology and strategic thinking and how these trends will unfold across the enterprise:
Rewriting the global map
Products sourced from China’s factories and supply chain infrastructure comprise the largest percentage of U.S. manufacturing imports, followed by Canada, Mexico, Japan, and Germany. Early in the year, key changes in global trade to monitor include submission of the recently inked United States Mexico Canada Agreement (USMCA) to Congress for ratification in February. In March, the 90-day trade war truce between the U.S. and China expires, opening a window for imposing new tariffs on Chinese goods. And the ongoing concerns about the security of tech components made in China will bleed well into 2019. In addition, rising wages make China a less attractive region to manufacturers.
As risks pertaining to intellectual property security and manufacturing costs in China increase, companies will begin planning significant shifts in supply chain operations. Component suppliers in Vietnam and Thailand stand to win some of these orders, although there has always been concern around the strength and capacity of the supply chain infrastructure beyond China’s borders. These issues dovetail with additional sources of risk, including typhoons, hurricanes, factory fires, and labor disputes within Asia’s emerging economies. Despite China’s manufacturing dominance of certain technology components, Vietnam and Mexico might also look more attractive from a cost and security standpoint as the year unfolds. However, procurement managers must be alert to questions about quality and availability when switching to these new resources.
Cost inflation: An upward trend
With the U.S. Federal Reserve promising additional interest rates hikes in 2019, U.S. borrowing costs are expected to rise. An inflated dollar also diminishes its reach and value abroad. This trend line, coupled with wage growth, tariff threats, and high demand, will conspire to inflate costs further.
However, another factor is also in play. Over the last five to seven years, it has been relatively straightforward to drive cost reductions for components as overall prices in technology tended to fall. However, numerous technological components are increasingly being incorporated into “non-tech” products such as light bulbs, automobiles and trucks, and household appliances connected to the Internet of Things. This trend in product development is contributing to a measurable spike in overall demand for electronic components. Moving forward, sourcing in high-tech companies will need to get more creative to obtain cost reductions or limit the impact of cost increases.
AI adoption picking up pace
As McKinsey analysts recently documented, the pace of AI adoption is accelerating from a “generalized awareness” by C-suite executives to increasing investment and adoption across multiple vertical sectors. The pace is expected to pick up in 2019, with companies launching pilot programs and proof of concept initiatives to test the waters of AI efficiency and return on efficiency (ROI).
There is also a close connection between digital transformation initiatives and limited rollout of AI-enabled technology. Enterprises concerned with achieving best-in-class performance for competitive advantage are willing to conduct internal audits on maturity and performance, experiment and revise specific business processes, measure the impact, and conduct iterative changes.
Most companies are already on some path to digital transformation. Among the leaders surveyed in LevaData’s 2018 cognitive sourcing study , over 75% felt that a digital transformation initiative is underway:
- Launched in past year: 35%
- Initiative active for 1-2 years: 25%
- Initiative active for 2+ years: 21%
- Initiative in the planning stages: 9%
- No plans under consideration: 14%
Expect a hybrid halfway point
For many organizations, predictive technologies will serve as a halfway point between automated processes in siloed departments and an integrated AI-led business. Virtually every organization has automated some portion of what used to be manual processes. Most current applications of enterprise predictive technology digitally collects and evaluates significant data and metrics but only from in-house sources. And to be truly predictive, algorithms must be running on massive data sets that pull from outside and third-party sources.
Consider a supply chain executive’s negotiation on pricing for pre-commercial procurement. With siloed, Excel-based spreadsheet reporting, procurement professionals are limited to a trend analysis (on future pricing, for example) based only on its past order. But imagine the ability to drill down into specifics on subcomponents, such as copper or aluminum. Imagine real-time visibility into commodity pricing trends by region or over time with data pulled from Forex (foreign exchange market) or past earning reports from multiple third-party data aggregators. Large and varied data streams improve the predictive quality on supply chain issues ranging from price to availability. Applying predictive models around specific areas of spend is an appropriate bridge leading to a full AI-driven approach. But a business truly running on AI-enabled recommendations and pattern sensing is still some years away.
Finessing contingency management
To accommodate 2019’s risk landscape, procurement will have a greater need to conduct scenario planning. Teams that employ “what if” scenarios will run through different possibilities to determine the potential impact on supply and determine new options to mitigate this impact. For example, a procurement officer might identify new suppliers or change suppliers in different locations.
The success of these strategic bets is always contingent upon the ability to find patterns in vast data sets beyond the obvious market trends and forces. Take, for example, the recent situation in the electronics market, which suffered from marked shortages in 2018. The ultimate cause was a production bottleneck; not enough factories were producing what was assumed to be a low-value item—multi-layered ceramic capacitors (MLCCs). Most procurement organizations were not familiar with the subcomponent item, but the shortage of MLCCs created a slowdown in the electronic assemblies of cars, computers, home appliances, and multiple end markets.
Procurement will need increased visibility into earning reports and/or highly localized business intelligence, while factoring in risk considerations and various scenarios before making recommendations or signing contracts. Knowing where tariffs might be applied geographically, how specific subcomponents are classified, and how elements such as transportation logistics, weather, and inspection processes will impact cost and supply will be increasingly important.
Building a better team
As previously noted, the search for cost savings during times of economic contraction can lead to penny-wise but pound-foolish cutbacks in procurement departments. Keeping in mind that these are the teams that save the enterprise millions of dollars on the bottom line, 2019 will require additional investment in supply chain professionals but with one caveat. In terms of new hires, the pendulum will swing towards hiring digitally sophisticated professionals versus commodity experts.
In 2017 and 2018, there was widespread recognition within the industry that the days of the “one-size-fits-all” approach to procurement hiring was over and that a mix of subject matter experts (SMEs) and digital natives was required. That has become even truer for 2019, with some hiring flexibility by managers seeking digitally mature candidates and unleashing them on AI technology to ramp up their category knowledge.
Currently, procurement small and medium enterprises (SMEs) still make up a majority of department staffing, but the hiring trend will focus on filling the tech gap. At the same time, commodity managers will increasingly be expected to have a moderate degree of comfort with new technology and understanding of its capabilities.
Countdown to product launch
This year, expect new product introduction (NPI) teams to significantly increase their use of predictive technologies.
While procurement organizations are driving the initial adoption of predictive tools, we’ll see greater use of these tools among cross-functional product teams being formed this year. These tools have proven value in a wide range of operational tasks, from selecting parts and choosing the right suppliers to increasing speed and optimizing costs. We’ll see some interesting scenario planning in new product groups, where they’ll look at how suppliers and other factors might impact gross margin over time.
Procurement: The new MVP
Empowered with such wide-ranging tools, expect the procurement team’s scope of influence within the organization to increase.
This will be driven, in part, by NPI teams looking to procurement for guidance on their production choices. Additionally, as product development times continue to shrink, increased collaboration and use of shared tools among NPI, engineering, finance, and procurement will also emerge.
Procurement teams will increasingly use technology to give engineering input on supply pace, projections and risks, so they’ll have an influence on a much wider range of engineers than manual approaches have previously allowed.
In an economic climate that holds growing concerns for many, the ability of procurement professionals to execute their strategic role with newfound expertise will result in goals met and milestones surpassed. The year ahead contains a silver lining, as it will feature greater collaboration and, ultimately, an elevated role for procurement professionals within the enterprise.