Category Archives: Best Practices

Primary Concerns for Procurement Leaders

In our last two series we noted that Deloitte recently released their annual latest and greatest CPO Survey with the help of Spend Matters, that was designed to highlight, among other things, the latest and greatest “observations, challenges, and trends” in Procurement, but that, in reality, just highlights the same problems, priorities, and barriers it found in the past 9 editions, just like every other annual survey in Procurement.

There’s no embellishment here. We mean every other study that has come before for years because:

  1. the doctor has been reading them.
  2. the doctor went back through 15 studies in detail that were released in the past five years and a few other related papers published in the same timeframe.

As part of this in-depth review, the doctor pulled out, for each of these 20 papers (which included papers from the usual suspects like Kearney, CapGemini, E&Y, PWC, and Everest), the

After doing so, the results were that, for the Deloitte study, analyzing the:

  • top barriers, of the 10 quoted in 2 or more of the papers, 7 are in the Deloitte study,
  • major procurement risks, of the 7 quoted in 2 or more of the papers, 5 are in the Deloitte study, and
  • primary concerns, of the 13 quoted in 2 or more of the papers, 8 are in the Deloitte study.

Moreover, if we were to abstract the barriers, risks, and concerns one level and start looking at the underlying systems or processes that would need to be addressed, the similarities would be even more significant.

More importantly, they aren’t changing much year to year, and aren’t going to change much for the next decade at least.

A year ago I penned a post where I pointed out that before you get all excited to learn about trends for fall conference season, with the exception of:

  • Gen-AI being the new fluffy magic cloud
  • Fake-take (sorry, intake) being the new dangerous and dysfunctional dashboards

the majority of trends that have been discussed for the past year are the same trends that were discussed ten years ago (and SI has the blog history to prove it, especially since it doesn’t purge over half of the blog history on a site upgrade and/or migration).

This is because the core purpose, and thus the core priorities, challenges, and risks, of Procurement haven’t changed in decades. The systems have evolved, the processes have become more complicated, and the global supply challenges haven’t been this bad since the nineties, but the core HAS NOT changed (and, to be fair, has NOT changed since the first manual was published in 1887 and has NOT changed much since cross-continental trade began thousands [and thousands] of years ago).

Which means we don’t need any more annual surveys on these issues (every 5 years would be more than enough, and even then you might find that the only movement is related to the hot tech of today vs. the hot tech 5 years ago, as SI did when it did its trend analysis last year).

In our last two series, we also noted that we weren’t going to bore you by digging up two decades of studies and showing the same issue lists again and again, because that’s not the problem. The real problem is that these core issues still aren’t adequately addressed after decades of these “studies” being published, even though it’s the same issues again and again that come back year after year after year, sometimes with a vengeance when an unexpected natural disaster or pandemic strikes, a war breaks out, or a fan of the Gilded Age believes that tariffs are the cure-all and starts global trade wars.

However, before you can solve these problems, or anyone can put forth a solution, you need to understand what these issues are, why they keep coming back, and acquire some insight into how you might deal with them once and for all and finally move the needle forward.

In our last two series we focussed on the barriers to success and the risks. This time we are going to focus on the thirteen (13) concerns that consistently stay front and center in these surveys and reports, of which eight of them are among the top concerns in the Deloitte survey.

  • CSR/ESG/Sustainability ([01], [03], [04], [06], [08], [09], [16], [17], [19])
  • Cost Control ([01], [08], [10], [11], [16], [17], [19])
  • Talent Acquisition/Upskilling ([00], [01], [03], [08], [10], [16], [17])
  • Compliance ([01], [04], [06], [12], [19])
  • High Inflation Pressure ([00], [04], [11], [19])
  • Supplier/Supply Chain Resiliency/Continuity ([00], [04], [08], [11])
  • Tech Transformation Delays/Obsolescence ([12], [16], [17], [19])
  • Geopolitical Uncertainty ([00], [12], [19])
  • Economic Downturn & Deflation/Recession ([00], [12], [19])
  • Managing Digital Fragmentation / Digital Transformation ([00], [01], [11])
  • Tightening Credit Conditions ([00], [12], [19])
  • (Gen-)AI Integration/Impact ([03], [04], [19])
  • Weakness & Volatility in Emerging Markets / Trade Wars ([00], [12])

It is hoped that you enjoy the continuing coverage!

Finally, remember to review our article on why You Don’t Need To Read Another State of Procurement Study for the Next 5 Years! if you want to dig up the referenced papers.

Breaking Down the Risks: Corruption/Fraud

Since we have had corporations, we have had corruption. This is another risk that’s not going away. Plus, fraud is rising rapidly!

Expounding the Pounding

There’s a huge amount of potential corruption and fraud that you need to worry about. It’s not something that anyone wants to talk about but it is something that needs to be talked about a lot more than it is considering that global corporate losses to fraud were estimated at 5 Trillion in 2024, or about 5% of global revenue! Fraud, for now, is the only risk more costly than natural and climate disasters.

When it comes to corruption and fraud, there are three places it can come from: inside (corruption), outside (fraud), and, the hardest to detect, internal and external partnerships (collusion).

Internally, you need to worry about situations like the following:

  • disguised procurements to bypass processes (such as split purchases)
  • false evaluations / awards
  • false expense claims

Externally, you need to worry about situations like:

  • supplier impersonation / false supplier
  • partial delivery (but full invoice)
  • bid rigging and collusion

And when you have parties on the inside and outside collaborating, you might get:

  • conflicts of interest
  • credit card / p-card fraud
  • kickbacks and bribery

And, we’re sad to say, this is just scratching the surface. The reality is that there are at least 15 major types of fraud you need to worry about in Procurement, and some are pretty hard to catch. Properly documenting these and the proper steps you can take to minimize your chances of falling victim isn’t an article, it’s a white paper. I know, I wrote an unpublished one a year ago. But we will give you a few tidbits to get you thinking in the right directions.

Reducing the Risk

In order to truly minimize the risks and reduce your fraud losses to minimal, vs the more-or-less industry average of 5% of revenue, you need to take a lot of precautions. Some of the most important ones are:

TP(C/R)M:Third Party Compliance/Relationship Management and Vetting
You need to ensure that all suppliers, carriers, and other third parties you plan to do business with are real, legitimate, vetted entities and that you have also vetted their owners/directors and vetted with the owners/directors the people you are signing the contracts with and accepting payment instructions from are employees.

CyberSecurity & CyberTracking
You need to install and maintain state of the art cybersecurity and cybetracking and make sure the source of every electronic communication is traced back to its source and the originating domain ALWAYS confirmed. Very smart cybercriminals can not only mask from and reply to fields on emails requesting a change in payment details, but they will register / hack and steal domains that are extremely similar to the company being impersonated. If the company is McDonalds.com, then, guess what, they will acquire (control of) MacDonalds.com and a quick scan of the email headers might be enough to convince even a moderately astute individual the request is genuine.

e-Procurement/Invoice-to-Pay/Accounts Payable
With mandatory minimum 3-way match before ANY payment is approved – NO EXCEPTIONS. The purchase order must match the goods receipt which must match the invoice.

There’s more that must be done, but this is where you start. It will prevent a lot of the common and easily prevented fraud.

Breaking Down the Risks: Regulatory compliance issues

There will always be a need to comply with local laws and regulations. Always. So let’s get to it.

Expounding the Pounding

Regulations abound (especially in Europe), and the products/services you sell and buy need to conform to all of them. These regulations relate to the materials, production methods, human resources, carbon and waste production, storage and transport, packaging, and even labelling.

And the severity of non-compliance can be severe. For each violation, your punishment for violations can range from fines to seizure to criminal charges! Even for the most innocuous aspect of product management: labelling. If the labels are incomplete, you can be fined. If the labels are not in the required language, your products can be seized and held indefinitely or destroyed. And if the labels are intentionally inaccurate, because you are trying to skirt regulatory requirements by not reformulating your production to exclude banned materials or meet the maximums for potentially dangerous materials, you can be criminally charged.

Moreover, regulations and requirements can be different in every single country you source from, ship through, and ship to and your organization needs to be aware of all of them so a “gotcha” doesn’t put your organization in a difficult situation without supply but with regulators breathing down your neck and threatening large fines, product destruction, and/or criminal charges.

Reducing the Risk

There’s no easy, or even, complete answer here, but what you need to build is:

Compliance 360.

You need a solution that

  1. tracks all of the relevant human resources, health & safety, production/(hazardous) material utilization, carbon/GHG production, packaging, labelling, and transport regulations for each country you build in, ship through, and sell in that can also
  2. match that regulation to each product/component/material you buy so that you can ensure that your supplier, carrier, or risk management department is aware of, and conforms to, the regulations as appropriate

This is much easier said than done. This requires

  1. providers who track the appropriate regulations in each country and how they translate into specific requirements that companies need to meet
  2. the capability to merge all of this regulatory insight into a common framework
    (often through a specialized platform)
  3. the capability to match these regulatory requirements to specific products … and this requires a system that maintains complete harmonized product (and product related) information from design and manufacturing through packaging and labelling to transport and storage along with countries of production/transport/sales to match to the regulations. Guess what? Unless you’ve harmonized all of this data into a common, integrated data model for multi-level planning (as you would if you integrated direct sourcing with supply chain and logistics, as per the series the doctor and Bob Ferrari did on why Direct Sourcing needs to be integrated with Supply Chain, summarized in Part 7), your chances of matching requirements to products are quite low. Not good!

This is one of the most extensive, and most involved risks, because there can be dozens to hundreds of requirements you need to adhere to in each region in which you do business, depending on the product (line) in question, but it is one you need to get a good grip on or supply assurance is going to become significantly harder as time goes on.

Breaking Down the Risks: Supply shortages/constraints / Competitive alternatives

Supply will never be assured. You have to be ready for that! Let’s again begin by expounding the pounding and then give a few tips on reducing the risks.

Expounding the Pounding

In some ways, this is one of the key risks contributing to the rising cost/spend pressure risk that we discussed in our last article, because even if an organization doesn’t see it, their tier 1 (and tier 2) suppliers will!

However, it is definitely its own category as there might be a surplus of supply, but current constraints make it inaccessible. For example, in the rare earths category in particular, the majority of global supply might be from one or two countries. If those countries become inaccessible due to a sanction, border closing due to a war or geopolitical unrest, or a logistics (cost) nightmare, then you effectively have a shortage even if there are theoretically stockpiles in a warehouse waiting for someone.

Plus, you don’t just have constraints around production, you have them around logistics (how many pallets can fit in the truck, how many pallets in the container, how many containers you can have on the ship, etc.), intermediate storage, export and import (as there are quotas and limits and passing those can be costly), and so on. All of these constraints can impact your supply and cause chaos.

Reducing the Risk

The two generic answer(s) here are the same as two of the answers to the risk of rising costs in our last post. You need to ensure that you always have

  1. Alternate Supply Sources Always Active
  2. Alternative Product/Component/Material Pre-Defined

That’s it. If supply is not available from supplier A, you need to have a supplier B on retainer (low minimum contract) ready to go. If there is all of a sudden no significant source for a material (due to a disaster, border closing, or trade route interruption), then you need to have an alternate design that can use an alternate material and switch production.

Breaking Down the Risks: Rising cost/ spend pressures/inflation

This risk is as old as Procurement itself. Demand drives prices. Always has, always will. But let’s start by expounding the pounding before we give you a few tips to deal with it.

Expounding the Pounding

Costs rise. Continually. The average rate of inflation in the United States over the past hundred years is approximately 3.2%. That means that something that cost $1 in 1914 would cost approximately $33 today. Costs go up. However, costs are not static. During pandemics, wars, natural disasters, and market crashes where there are huge drops in supply and surges in demand, or vice-versa, the average rate of inflation can quintuple or more (with a recorded rate of 23.7% in June 1920). The same happened to shipping costs during the pandemic. Three thousand dollar shipping contains shot up to thirty thousand, a factor of ten.

However, it’s not just inflation, and surges, that are the issue. It’s also consumer demand. If consumer demand shrinks as costs rise, and the company, and its suppliers, are unable to reach and maintain the optimal economy of scale, costs will rise even more. (Every company has its own optimal output level where it can operate at maximum efficiency and maximize outputs relative to inputs. If output is too low, and resources are not being used at capacity during regular operating intervals, the cost per unit of product is higher than it should be. Similarly, if that peak is surpassed, then overtime will need to be added, additional equipment and lines, which can’t be kept producing at optimal levels, will need to be added and so on.)

And, of course, it is available supply. If the product requires a renewable commodity or raw material where there are limited harvests or limited mining capacity, there just won’t be the supply to meet a rapid demand surge. This will cause prices to surge even more (as sellers sell only to the highest bidders as the balance of power shifts fully to them).

Due to the rapid rise in global market uncertainty around product and material availability and cost — due in part to an increase in natural disasters and extreme weather, wars, geopolitics and trade wars — managing this balance between consumer demand, market supply, cost, and inflation is a tough equation.

Reducing the Risk

There’s no easy or truly global solution here. Every category, and product, is different. Every supply and demand market is different. Every country has its own trade rules, economic plans, and sanctions. And all of this can change overnight. A mine collapse or factory fire. A rapid drop in demand due to recession. A new sanction or 145% tariff. And so on.

However, if we break it down, there are three main risks:

A) Unexpected Supply Unavailability

Due to a natural or man-made disaster, your (primary) source gets cut off.

B) Unexpected Drop in Consumer Demand

Due to a new external market condition (recession and/or massive layoffs, more popular competing product, brand backlash, etc.), consumer demand suddenly drops.

C) Unexpected rapid cost increase due to natural or man-made events.

A pandemic, droughts in Panama, or terrorists (in the Red Sea) slow down or cut off shipping routes and escalate costs. Or a mine collapse shoots up raw material costs.

For each of these risks, there is a primary solution:

A) Dual/Tri-Sourcing

It’s critical to always have an alternate source of supply in an alternate geography that can be scaled up rapidly if the primary source of supply becomes unavailable. Don’t do 80/20 or even 70/30 splits if the product, part, or material is critical. Do 60/40 and make sure both suppliers could handle at least 50% additional capacity before awarding. (That way you are still fine if the 40% supplier becomes unavailable as you should be able to scrape by long enough to find an emergency replacement supplier, even if the cost increases moderately. Most importantly, if the 40% supplier is willing to do some OT, you would still be fine for a short interval as long as you were willing to pay some OT related costs – and there’s no way that would be the case with a supplier getting less than 40% of the award.) Better yet, for (very) large categories, do 40/30/30 splits (possibly by giving majority per regions if your organization is global). In this situation, one supplier becoming unavailable wouldn’t be a serious problem as you’d be fine if the other suppliers could supply an extra 50% to 60%.

B) Flexible / Discount-Based Contracts

Never assuming continually increasing demand. Hope for it, but look at past averages, rises, and falls, and typical drops in demand from an unexpected, negative, market impact, and negotiate contracts for a range, with cost reductions (and not discounts) when thresholds are reached. In other words, once you know the expected worst case to expected best case range, ask for quotes for at least 3 tiers, the minimum, the expected, and the best case range and negotiate a contract with price breaks when certain demands are reached. (Suppliers will love to offer rebates when you hit a tier, but don’t fall for that because you’ll never realize them because the onus will be on you to prove that you’ve purchased the required quantity. Even if you have the best e-Procurement system on the planet and capture every order, as well as returns and show any refunds were accounted for, and can document it all, you still might not get the rebate. The supplier could claim hardship or, if the amount is significant enough, file for bankruptcy protection and restructuring. And even if they have the money, if you can’t assemble and provide the necessary documentation before the contract expires, forget about the rebate after the contract expires.) As long as you ensure every order, invoice, and goods receipt, flows through your e-Procurement system, you can ensure that as soon as the first discount tier is reached that you issue the PO for the lower amount. (And then your system will refuse to auto-approve it if the invoice doesn’t reduce the unit cost appropriately).

This way, you’re paying more than you’d like if you hit the worst case, but you’re not paying a huge penalty when you don’t hit the contracts and the suppliers come after you for damages.

C.i) Alternative Source Ramp-Up

If the price skyrocketed due to a supply issue with a specific region or supply base, you switch to the alternate supply in another region until the issue passes or you identify a new secondary (or tertiary) supplier for the product or component or material.

C.ii) Alternative Product/Component/Material

If the price skyrocketed due to a drop in supply, pushing all the power to the suppliers, then you switch to alternative products/components/materials. This is difficult because you need to have alternate designs ready to go for custom-made products and have previously identified alternatives for standard/off-the-shelf products which, while more costly or less desirable at the time, are now the most cost effective or most desirable products/components/materials due to the change in market dynamics by a material/component/product unavailability.

Unfortunately, while these solutions all sound simple, they are different for every category, product, material, organization, and geography. Risk management and supply assurance (as summarized the doctor‘s and Bob Ferrari’s Direct Sourcing MUST be Supply Chain Aware and Vice Versa series, summarized in Part 7) become as important as cost, and in some locales, carbon management when sourcing. The (expected) worst case has to be considered at all times and key events need to result in multiple, but balanced, awards.

And of course, when it comes to risk management, there will always be exceptions to the rule that you need to look out for.