8 October 2013 | Will Green
The upturn in the UK economy comes with fresh challenges for procurement, discovers Will Green.
The green shoots of recovery have been spotted. Business surveys are showing economic growth and the UK is “turning a corner”, according to chancellor George Osborne.
The downturn and resulting weak demand, however, led to suppliers cutting capacity to the bone, and IMF figures show inventories are now lower than they were during the 2008 crash.
This situation presents a new set of challenges for procurement, as vendors enjoy their moment in the sun, while buyers scrabble around for scarce supplies.
John Glen, senior economics lecturer at Cranfield School of Management and CIPS economist, says: “Global stock levels are at historically very low levels. The danger is you get an upturn in the cycle and, instead of worrying about burying cash in the inventory, people say, ‘if we don’t start to restock then we will miss opportunities for sales’. We are at a tipping point where the needle could flip from fear of burying cash in stock, to not having stock to meet future demand.
“The danger is, if you are a purchaser going into the supply chain and the supply chain is doing the same as you, they will say: ‘I can’t supply you’. And then you start to see failures in the supply chain and increases in price as procurement professionals bid supply away from their competitors.”
This happened in 2010, Glen says, when the economy picked up after the 2008 crash, only to fall back again following the eurozone crisis.
Innovia Films experienced these forces at first hand. The company produces cellophane and polypropylene packaging for household brands including Quality Street, Babybel and Mr Kipling. It is dependent on a very small number of suppliers for polymers, which are also used in the automotive sector and in white goods. As demand in these sectors fell away after 2008, vendors cut back their production.
Innovia purchasing director Ian Robinson says: “There was enormous disruption and we simply couldn’t get the raw materials. Our brand equity was at stake. We would be seen as an unreliable supplier.”
Robinson, who joined the firm in October 2010 with a mandate to address the problem, carried out a risk assessment that showed 51 per cent of raw materials were “at risk”.
The challenge he faced was that, although Innovia bought around 70,000 tonnes of polymer each year, with one contract alone worth â‚¬50 million, Innovia was still a “minnow” compared with other customers in the market.
“We sat down with our two main suppliers and said, ‘we can’t go on like this’. We started the process of getting our relationship back on track,” says Robinson.
This involved building trust through regular meetings, at least every 12 weeks, covering topics including capacity, and agreeing with vendors the criteria they would be measured against.
Robinson’s work has produced savings worth millions of pounds and a safer supply, although the signs of economic growth have rekindled previous fears.
“Our suppliers have got a very careful balancing game to play. If they have over-capacity they will depress the price of their polymer into the market,” says Robinson. “We are always concerned if they go too far the other way and we get into the situation we found ourselves in 2010, when there wasn’t enough capacity.”
Until inventories are normalised, Glen says, any recovery will be an “acid test” of an organisation’s supplier relationship management, with vendors firmly in the driving seat. “This is their moment in the sun,” he says.
Eva Wimmers, SVP of group procurement at Deutsche Telekom, says in a time of scarcity it’s important to offer vendors value, which doesn’t have to be cash but could be taking decisions and getting contracts out quickly, sharing market information and involving them in new product discussions.
“If you’re in a world of scarcity you have a problem because you might not be the preferred customer, and you will get into a lot of trouble if you suddenly have to be in a long-term relationship with a vendor,” she says. “Hopefully, in the economic crisis we have learned with vendors to speak to each other on different levels.”
Todd Bradley-Cole, procurement planning and support manager at John Lewis Partnership, says more attention will need to be paid to contract terms as the economy returns to a healthier footing.
He says: “A lot of our work is in ensuring the supplier base is suitable, not just for now but for the future. The contracts will need to be robust but they also must have the capability for us to come back when we’re ready to renegotiate or review what’s going on. You can get caught up in contracts which are not relevant, or the volumes change, or the landscape is changing.”
Jim Carter, head of contracts and procurement operations at Network Rail, agrees. “If markets are changing very quickly you don’t want anything too prescriptive,” he says.
“There may be ways you can develop more opportunities for mutual benefit through contracts, with more partnering and more flexibility. The opportunities for effective contract management become more pressing.”
However, he also sees opportunities in the growing economy. “It’s pros and cons at the moment. We need to track very carefully, and we do this through our spend analytics data, we have to keep a close eye on the financial health of our supply chain.
“In theory if the market is more buoyant there will be more companies coming into the market and less chance of suppliers going under. There are challenges but maybe it will save some of the headaches of suppliers going under.”
The years since the 2008 economic collapse focused attention on procurement, with cost-cutting the order of the day, but is there a risk the value of the function will be forgotten as sales and growth return? Carter says he believes procurement professionals have done enough during the lean times to show their worth. “I would hope organisations recognise it’s much easier to make contract savings than grow your revenue,” he says.
“I hope organisations don’t forget the value procurement departments have provided.”
‘Victims of our own success’
Recruitment experts are predicting firms will find it difficult to hire the procurement professionals they need as the economy returns to growth.
Purchasing teams have not been reduced in the same way as other departments during the downturn, because the focus has been on cutting costs, and, according to Hays Procurement, there is a “real shortage of core skills at buyer through to category manager level”.
Nicky Taberner, director of Hays Procurement & Supply Chain, said: “There is still a wealth of experienced interims available but they come at a cost, and most organisations would rather strengthen their permanent headcount to future-proof their business.
“Procurement is also a victim of its own success, to a certain extent, as the function has grown in importance at a much faster rate than it has attracted people into the profession, so more needs to be done to train people into this career path.”
Taberner says growth will allow buyers to expand their horizons.
“With a recession came the inevitable focus on cost savings but now we are coming out the other side, procurement teams have been able to refocus on sustainable procurement, risk minimisation and supplier relationship management to enable them to get better products and service levels,”