Watching your spend can keep a business stable during economic uncertainty – but it will take a more targeted strategy to achieve growth
Consecutive trade shocks over the past three years have placed businesses in an unenviable position: endure or grow? It’s a problem that lays bare the age-old conundrum of whether organisations should look to cut costs or keep investing in the pursuit of stability.
World trade is once again experiencing turbulence in the form of a mass energy crisis plus hyperinflation, which together are pushing many economies to the brink of recession – a harsh reality for the UK and numerous countries across Europe. Coming on the heels of a pandemic and geopolitical unrest, it’s easy to think we’ve been here before.
But while special measures may have carried us through before, the same approach might not be applicable this time around. However, what the profession has gained from the lessons of recent years – prowess in relentless problem-solving, a willingness to adapt quickly and having the reputation as a trusted business partner – all remain.
Arguably, the most crucial element when planning how to steer organisations through the recession is relationship management. Because even if you operate in a country that has escaped the worst of the downturn, your suppliers and customers may not be as fortunate.
Naturally, supply chains are at the front and centre of the global business agenda. Inventory reports have become cautionary tales, with retail giants, including Walmart and ASOS, having hoards of unmovable stock, purchased against a voracious consumer appetite when early-pandemic lockdowns meant people had more disposable income. Now, with significantly higher domestic bills, many consumers are tightening their belts and buying only the essentials. This has contributed to a fresh struggle to balance demand, albeit at the other end of the inventory scale.
“We’re in a slightly different context but I still think the supply and demand outlook is going to be really complicated,” says John Ferguson, head of Economist Impact’s Globalisation, Trade and Finance practice. “That will be the big story of how people manage their supply chains over the next 18 months, because the demand outlook is so convoluted and complicated.”
He continues: “This isn’t going to be a universal global slowdown or recession, and understanding demand growth in different regions is complex and difficult. Managing that demand outlook in severe economic times is going to be the key challenge.”
The next 18 months will be difficult for the UK and Europe. If inflation and interest rates remain high, this will increase the pressure on businesses and households, and consumer purchasing power will be challenged. For businesses in consumer-facing sectors, demand for products will soften.
But, as Ferguson says, this is not a global scenario – the US and Asian markets are likely to avoid a recession, while the Middle East is forecast for a year of growth. So supply chains, and procurement in particular, will have to protect from risk while driving growth – against a backdrop of fluctuating regional demand, the two aren’t mutually exclusive.
“We monitor our supply base to track if the firms we use become financially unstable, so we have a duty to minimise the risk,” says Dr Clive Rees, vice-president, international chief procurement officer at Fujitsu. “At the same time, we’re trying to help the business grow its revenues and margins. What we’re experiencing now is a balancing act between speed, agility, risk, compliance and governance.
“It’s a challenge when you have to respond at speed, knowing we also have to consider sustainability, diversity and environmental considerations. But managing complexity is what our job has evolved into. We have to support the business to grow – otherwise what’s the point in procurement?”
This is compounded by Fujitsu’s modus operandi for its procurement people, which is “to be a business person working in procurement”, not the inverse. For many, this was a core lesson of the pandemic. As supply chains withstood the immense barrage of disruptions between 2020 and 2021, this fortitude was less about luck and more about how procurement supported businesses, Ferguson says. And these experiences from the recent past give an indication of how to respond to current crises.
“The fact that some supply chains held up is evidence of the work that made them more resilient,” Ferguson explains. “The extra technologies, the diversification and the regionalisation made supply chains more resilient. I think we have that opportunity again. Supply chains are in a much better place than they were pre-Covid so I think that, over the next 12 months, there’s an opportunity to build on that and continue the lesson learned from that period.”
Race to the bottom: the false economy
During any period of financial turmoil, the motive for cost cutting is plain. For companies currently operating in Europe and the UK, rising inflation, soaring interest rates and low demand for product have blighted the bottom line. As a result, cutting costs and reducing inventories are likely to be popular measures but there is a sense that they won’t prove to be wise decisions in the long run.
“Cost reduction has to be taken as an informed decision in the wider context of how it helps the business,” says Rees. “We could cut costs tomorrow but that wouldn’t help the business to win or retain relationships. We have 30 key alliances – if we damage them, it damages us. If we are to grow, then they have to grow, too. We can’t just drive them low on price and think we’ve done a good job. They have to be profitable in the same way that we are, so we build that relationship together.”
It feeds back into the notion of the supply ecosystem, which recognises that, by raising the floor, you automatically raise the ceiling too; that investing in your partners and working with them is beneficial for profits all round as well as the industry as a whole. It’s an egalitarian view grounded in common sense, not least because it simultaneously builds resilience while laying the foundation for growth.
There is, of course, a natural tension between the need to manage costs and create resilience. However, it’s worth bearing in mind that whatever process or strategy you follow for resilience, it will absorb money in some way, whether through time or human resources. That is, in itself, a balancing act that plays out across every disruption – though it contains its own uncertainty because you can’t guarantee you will come out any better. You can, however, guarantee there will be disruption and uncertainty, so the best path forward is a pragmatic one.
“One of the biggest risks we have going forward is cost cutting,” says Omera Khan, head of supply chain insights at Maersk. “After a crisis or disruption, you tend to find most companies start looking to costs rather than investing in things like people and skills training or technology. Those things actually help you to negotiate risk and manage disruptions.
“The failure to continue investments, to continue building the organisation and its supply chain, is to the detriment of its future agility and flexibility. You lose some future awareness and you return to a period of stalemate again.”
It’s a prescient point. Cutting costs to the detriment of your future position is very much one step forward, two steps back. Supply networks are increasingly dynamic and complex, so there is a real need to be able to withstand the many and varied shocks that will come, whereas aiming to return to square one cannot be considered a mark of progress.
“Moving forward, I don’t think there’s much scope or capacity for supply chains to be slow or unresponsive,” adds Khan. “They can’t really afford to make mistakes. The clock-speed of supply chains has increased so significantly that most companies need to react even quicker than before. My advice would be to keep your eyes on your long-term vision.”
Prioritise value by hedging your bets
The current economic situation is something of an anomaly as far as the past decade is concerned. Over the past 10 years, interest rates in Europe, the UK and the US have hovered at around 0% but now, with rates from central banks reaching 3%, 4% or 5%, loans and credit cards are much more expensive.
This has caused exchange rates to fluctuate as financial markets “throw money around the world” and has, in turn, set the dollar very high, creating a headache for companies in the supply chain, especially SMEs.
“It’s becoming harder for companies to know what exchange rates to lock in,” says Ferguson. “If you lock in a currency for six months and get the call wrong, as a buyer or supplier that might cost you a few hundred grand. Smaller organisations are particularly vulnerable to this.”
As far as risks go, it’s another one that comes down to striking a balance. We hear a lot about value and long-term vision; judging the payoff between those and the immediacy of a crisis is all the more difficult when financial markets are so volatile. So what should procurement prioritise?
Despite the volatility, hedging on indirect spends, such as energy or parts, would provide a degree of certainty on price. It’s a calculated risk, of course – if you fix on a price and the market drops, you’ve lost money, but the opposite is also true. However, by making an informed decision on what the market is likely to do over the next year, you can strategise according to your needs, as procurement consultant Jim Goodhead explains.
“You could buy 50% forward and the rest on spot,” he advises. “When I worked at Southwest Trains, I bought power in a consortium. We broke it down into 12 months, 12-monthly statements. And if the price reached a certain band, we would buy so much to fill that month. It would be 12 months where we’re just looking forward, we might buy for December, January and February, because we couldn’t get the right price. That’s one way of doing it.”
It’s not uncommon, Goodhead adds, for organisations that favour hedging to buy stock and hold it with suppliers. But in a market where cash is king, having inventory tied up in stock may be a risk too far. Goodhead believes the answer is to leverage strong relationships with suppliers to find mutually beneficial outcomes.
“People focus on the cost of things but cash flow accounts for many a failed business,” he says. “If you’re hedging and need to protect cash flow then negotiating with suppliers for longer payment terms is your best approach, but you have to be careful. This is why you need good, long-term relationships with suppliers. Without them, you’re stuck. But with them you, as a procurement professional, can protect the business by getting the products it needs while protecting cash flow. Without that, your company is going to struggle to deliver value.”
Protecting the business
Shocks and disruptions are, by and large, beyond the control of any organisation; market health, recessions and the lack of public sector spending in some countries will all make an impact. How procurement is able to deal with this will be of the essence.
At Fujitsu, the procurement department operates under a five-point strategy, which is aligned to that of the wider organisation. The strategy covers cost, compliance, ESG, governance and people. Part of the approach is designed to mitigate risk before events happen and to maximise resilience when disruptions occur. It determines the process and response to risk or potentially harmful situations that procurement takes, providing much-needed agility.
“So our procurement policy flows from our strategy and then each of our category teams in regions will have plans to engage with the market and deal with local risks,” says Rees. “If there are global risks or global opportunities, then we link my team into our headquarters in Japan to tweak and we follow what headquarters wants.”
He continues: “But it’s more about the structure and the process we have in place to be able to respond quickly, given the context of trying to help our people go to market quickly, while trying to minimise the risks. We don’t want to be non-compliant, we don’t want to expose ourselves to risk. We don’t want to contract with suppliers that are financially unstable or have got the wrong reputation – the wrong image will hurt our reputation.”
In the context of the organisation, this positions procurement as enabler and strategic partner; it is grounded in the guiding notion that procurement is a means to achieving business ends.
And while this makes for a more complex environment, that purpose is fulfilled every time. Rees explains: “You can plan scenarios for most situations, and that gives you a process through which to respond. We know that striking the balance with our suppliers is as important as striking the balance with our internal teams – both have separate demands and needs, and our job is to manage those relationships. Having a process and principles in place to support that is invaluable.”
The need for greater resilience has also propagated the trend of shortening supply chains. According to Ferguson, research carried out by Economist Impact shows more regionalisation and diversification as a whole. In a sense, it is symptomatic of the evolution of globalisation. As consumer demand for rapid delivery times becomes greater, it is inevitable organisations will want to get closer to their end users; by 2030 last-mile fulfilment will be among the biggest competitive differentiators.
This is only part of the resilience equation. Companies burnt by the fallout from the pandemic, geopolitical volatility and dwindling natural resources are repositioning their supply chains. While in the short term it may prove costly, as Ferguson says, it will the best approach for the long term.
“The situation has become a lot more complex. We are seeing more diversification, a little bit more regionalisation and more companies using substitution and substitutability, especially with sensitive things like tech and chips. So with some sectors, some types of products are being onshored or brought closer to home because of government policy or conflicts,” he explains.
“And then there are situations like the war in Ukraine that are forcing people’s hands. A client [of ours] found they were exposed to Russia in their fifth tier so had to pivot away. In a general sense, those situations are creating complicated business models, where some supply chains are regionalised while others remain global. It’s indicative of the very complicated business models going on right now, and people trying to do due diligence on their entire supply chain to protect themselves.”
Is opportunity knocking?
It is often said that in every crisis there is opportunity. The reconfiguration of global supply chains taking place as a result of disruptions, while indicative of efforts towards longer term resilience in general, present the opportunity for procurement to move organisations towards a future readiness mindset.
Loosening dependencies, deepening existing relationships and building new ones are defining themes, and are perhaps no better exemplified than by Apple’s decision to transfer large parts of its production and assembly from China to Vietnam and India, as well as, more recently, moving some of its critical component sourcing to other countries in the East and the US.
This immense upheaval demonstrates a recognition of procurement’s power in business strategy, how it can exercise its supply chain expertise to reap immediate rewards that will pay off in the long term. Organisations that don’t embrace this, says Khan, run a big risk.
“I think the biggest risk is for companies that are failing to recognise they need to redesign their supply chains, and that potentially need to look at more regionalisation and localisation,” she says. “As consumers are becoming much more environmentally and ecologically aware of the footprint of the products they’re going to buy, the biggest risk is for companies not having the vision to innovate and to make change happen – and procurement should lead on that. We need to start looking at supply chains not as linear transactional relationships but as ecosystems.”
It is a call to arms that challenges the current business paradigm. Western-centric business models that fixate on low-cost materials, low-cost production and low-cost labour are slowly falling out of favour. The appeal of these sourcing arrangements betrays a dependency that won’t work as effectively in the pro-resilience world as it did in the pro-convenience one. That is, in itself, a huge risk and, in the context of current and future disruptions, one that few businesses would want exposure to.
It’s a problem that procurement is primed to solve. “One thing we should have learned from the pandemic and other black-swan events is we need people who are masters of managing risk in the supply chain,” adds Khan. “There are opportunities for those businesses that prioritise training and preparedness, develop threat horizons, develop a dashboard of what could potentially happen using a scenario-based approach to evaluate, assess and move forward at all times.”
This type of planning has been used to great effect at Fujitsu. “When we’re back to so-called business as usual, we review what’s happening in the market and decide where we need to tighten up, where we need to improve and how we plan to go forward,” says Rees. “We determine what we do and how we then change it to support the business. And we come full circle, back to everything we do to understand the business situation, its growth plans and change with them. That’s why our internal client relationship management is crucial.”
This last point is arguably the most important, certainly in the immediate months. It is also a position that is widely agreed upon, despite procurement and supply chains viewing the issue from different angles.
“I find it really fascinating that, as part of their resilience efforts, we’re seeing organisations trying to deepen their relationships,” says Ferguson. “It stands to reason because if you have a deeper relationship with a supplier, they’re going to trust you and will be more inclined to help you. So I think the past two or three years have taught people not just the value of knowledge, data and technology, but the value of having trust and deepening those relationships.”
The sentiment also fits the future perspective of procurement. To meet the significant challenges the profession faces – establishing new supply chains, reaching ESG KPIs, supporting digital transformation – collaboration is crucial.
“I think investing in partners to boost resilience in the entire supply chain is going to be integral,” says Khan. “We need trust, we need transparency and we need to share the relevant data across our end-to-end supply chain. And we have to listen to the voice of the final consumer to develop much more customer-centric supply chains.
“Partnerships are important; and that’s not a partnership between the biggest player and the others, it means end-to-end partnerships with all parties.”