…CPOs are battling geopolitical risk, Brexit and volatility to protect global supply chains and deliver business as usual. So what should they do, and how are they making it work?
The escalating international tensions are reverberating in boardrooms. Across the world, a growing number of CEOs predict global growth to slow this year, mainly due to trade conflict and geopolitical uncertainty. The PWC annual global CEO survey makes sobering reading when it comes to supply chains too: nearly half (45%) of respondents said that changes were needed in their supply chain to ensure products and services are delivered effectively. Brexit and the US-China trade war were top concerns.
Procurement professionals increasingly feel the need to act. When surveyed in early 2019 for a Basware Economist Intelligence Unit report, 35% of EU-based procurement and finance professionals expected an increase in procurement costs, 37% had developed new sourcing options as a result of trade tensions, and 29% anticipated greater supply chain complexity. Remedial action has been taken by US companies Whirlpool, GoPro and footwear maker Steven Madden, which are reported to have moved some manufacturing operations away from China. Others are negotiating discounts.
UK supermarkets and manufacturers including Rolls-Royce had stockpiled and built up inventory to cope with potential disruption in preparation for the original Brexit deadline of 29 March this year. While much of this stock has since been sold through, there were expectations that the same would happen in the build-up to the October deadline, says Philip Woode, senior manager at procurement consultancy Efficio.
CPOs have also used the climate of uncertainty as an impetus to undertake a ‘hefty’ review of their supply chains and suppliers. “Some have identified long-term risk, which has always been there, but never fully recognised before,” says Woode. “They are not only de-risking Brexit but also the whole supply chain.”
There are others who have not planned long-term, he adds. “Many have buried their heads in the sand and hope everything works out OK. They are blasé, including a manufacturer who told me they would keep ordering and stockpiling, and they would be fine. They hadn’t considered the effect of tariffs and foreign exchange on their costs and prices and whether they could pass these on.” In the grocery sector, some believed that a solution would be put in place by the EU27, simply because EU growers wouldn’t want fresh fruit and food to rot in a six-day port queue.
Clive Rees, international CPO at Fujitsu, explains that his business always undertakes a series of strategic planning initiatives around potentially disruptive events such as Brexit.
“Before the original March deadline, we had a dedicated procurement group considering planning and scenarios, as well as a business-wide group,” Rees explains. “In the procurement discussion, we were focusing on issues such as people, products and services and how we could react in an agile way if and when Brexit occurred. We also talked to suppliers and customers to see what their concerns were.”
Rees and his team focused on staff movement around Europe as “we buy a lot of IT contractors”. He explains: “We looked at long and short-term visas, cross-border contracts, settlement rights and whether we would be able to use contractors on various projects and still move them about Europe easily. We also looked at services, what we could procure cross-border and the extra costs of moving equipment twice in and out of countries for repair cycles.”
Rising trade tensions between Japan and South Korea are on his radar too. “We are a Japanese company and have businesses we buy in from and supply in South Korea, so we look at the risks and how to mitigate them. That means looking for alternative sources of supply,” he says. “And we had to react quickly to the US ban on companies using Huawei technology. We had to quickly ensure that we had the right supply chains in place and again use alternative suppliers.”
Fujitsu’s international procurement operation in California helps with decision making and there are alert and crisis teams in Europe too. “You never know what is around the corner,” he says.
David Loseby, an interim CPO for companies including Halfords, says businesses he has worked with have taken a long-overdue look at their supply chains as a result of Brexit, rising costs of doing business in China, changes in world trade tariffs and the dispute in the Strait of Hormuz near Iran.
“It’s been less about procurement and more a focus on the value chain activities in the end-to-end sourcing and supply chain, such as looking for manufacturing efficiencies, stock turn and cost of capital,” he says. Options to come out of that include staging the supply chain to manufacture white goods components in the Far East, shipping more near-shore to southern Europe to assemble and ship again for lower warehousing costs. “It’s all about preserving and protecting the supply chain,” he adds.
The simple answer for many is to keep stock close to where their customers want their products to be, but this can layer in a huge stockholding cost, and adds the expense of the warehouse space and damage of moving stock multiple times. As Michael Poultney, managing director of stone supplier Albion Stone, said in August: “I don’t think it’s worth me wasting another £200,000, buying in stock, on the very slim possibility of a no-deal Brexit.” The company had stockpiled materials and equipment in advance of the March Brexit deadline, but have not done the same for October.
A series of knee-jerk reactions, such as seeking costly air-freight solutions to ensure goods are delivered on time, in addition to stockpiling, can damage medium-term plans as cash is diverted away from investments, innovation and new product development.
How to find value in flexibility
Geoff Pollak, an interim CPO and managing director of consultants Alvarez & Marsal, also links more nimble supply chains with added cost and complexity. “I’m thinking about where am I getting my commodities, components and materials and where am I choosing to assemble and combine them. In the US, any country with a trade deficit is a potential target, so I need to ask: if not China, where else can I put that production or find that source of supply,” he says. “It is not about whether you are paying 50 cents an hour more here or there, it’s about whether you are going to be facing a 20% tariff hike. If I have to move my production in a window in which Brexit or tariffs might be applied, that is a higher cost to me. How much inventory do I need to build up before I can move production? Do I have to invest in dual-tooling and extra capacity? So, the ability to weigh, balance and flex those moves becomes very valuable.”
Another cost, he adds, is the extra time a procurement department takes avoiding disruption. “Perhaps they were going to be working on cost-out ideas or identifying other sources of supply as part of a strategic plan. Now they are hustling over where to produce,” he says.
What is clear, certainly with Brexit, is there will be significant changes to business supply chains, as Woode explains: “Trade routes may have to change because Dutch ports appear to have been more proactive in getting ready for Brexit than those in France. We may see more sourcing of new suppliers in Asia. Some companies have done this before, attracted by lower costs, but there’s been a challenge to maintain quality. I expect that when they look again, they will see an opportunity to introduce more local-market quality-assurance structures.”
Prepare for the worst-case scenario
Woode’s advice to CPOs around Brexit is to be on top of the risks. “Look at the impact of currency swings, where your suppliers are and whether they are affected by Brexit, as well as trade wars or the Iranian dispute,” he says. “Look at the worst-case scenario, including WTO tariffs, for every product.”
Professor Richard Wilding, logistics, procurement and supply chain management at Cranfield School of Management, knows a procurement officer in a global motor company who keeps a constant tab on the CIA World Factbook, which monitors trouble spots, levels of disruption, growth rates, briefing him on potential challenges. “CPOs need this intelligence and data,” he explains.
Woode advises CPOs to consider contract risks. “Will businesses or suppliers look at using force majeures? Are there terms which allow for cost negotiations?” Such preparation will be resource intensive and require collaboration, particularly with sales, marketing and finance departments, he admits. “Brexit is ultimately going to affect profitability, so procurement needs to share its data with others.”
Wilding agrees that while procurement can be siloed, it needs to understand corporate strategy and what is driving value in the final marketplace. “A customer might want lead times reduced, which means you need to source from a more local supplier. If the design team says we have to use a particular material and there is only one in the world, then options are restricted. So, getting designs from the outset which offer more flexibility in sourcing is important. Be proactive and plan for disruption.”
For Pollak, this requires a greater focus on the CPO role and the need for “true strategic sourcing led by CPOs who have a deep understanding of the markets and their supply base”. He says: “There is also a greater need for supplier management and engagement because you have to understand their footprint and cost structure. That only comes through dialogue.”
In these turbulent times, procurement has ever greater significance for the business, making it a great opportunity for the profession to step forward and deliver.
We spoke to seven CPOs who are doing just that, having spent the last three years anticipating Brexit…