Category Archives: Procurement Damnation

Primary ProcureTech Concern: Weakness & Volatility in Emerging Markets / Trade Wars

Emerging markets are your future markets, and often the source of critical raw materials.

Why?

Given that a lot of outsourcing has been redirected to these “low cost” markets over the past two to three decades, any rapid increase in volatility becomes a significant concern, especially if the markets are not strong enough to weather the storm. A major event could wipe out an entire subset of the supply base literally overnight, greatly increasing supply shortages and increasing the market complexity. Or at least make it unsustainable, such as a 145% tariff on China which is the source of over $500 Billion dollars in imports into the USA.

Impact Potential

The impact of a “low cost” market becoming unavailable, or at least unsustainable, is moderate to severe, especially if all of your outsourced eggs are in the same country basket. One lesson that some companies haven’t learned yet is that dual sourcing is not reducing risk if the two sources of supply are in the same country (or the same small geographic region — because if you have two factories located 100 miles from each other on two sides of a border, guess what, one natural disaster can wipe them both out).

If your primary source of affordable supply is wiped out overnight, it could take months to identify a new source of supply and quarters to secure the supply and get your supply chain flowing properly.

Major Challenges/Risks

Foreign Market Predictions
It’s hard to predict what’s going to happen in a foreign market that you aren’t in everyday. You can follow economist predictions, follow currency trends, try to get a grip on the trade relations between that country and your home country, and so on, but it’s not easy. If you can predict early enough, you can take action. But if an administration, without warning, decides to drop 100%+ tariffs on your source of supply, you’re in trouble.

Alternate Sources of Supply
Sometimes there’s few sources of supply for a given material, part, or product outside of a given country that has a similar total cost of acquisition, especially if you aren’t sourcing at full volume. Identifying alternate sources of supply that you can switch to quickly can be quite a challenge.

New Market Identification
If the emerging market also happens to be one of your primary emerging sales markets, the hit from volatility can be quite significant if the volatility results in rapid inflation, job loss, or both and your sales start to drop rapidly.

Final Words

Given the globalization of today’s supply chains, where a product can depend on materials and parts from dozens of countries, weakness and volatility in emerging markets is a significant concern. And we have yet another (fourth) reason you need an economist!

Primary ProcureTech Concern: Tightening Credit Conditions

The world runs on money, regardless of what form it comes in. Gold, cash, or credit. Credit is particularly important because it helps an organization bridge between cash cycles.

Why?

If economic downturns or inflationary pressures arise quickly, then credit will also tighten.

Impact Potential

If the organization, or its suppliers, needs credit to produce and distribute the goods for sale, the lack of interim credit could lead to reduced inventories and sales and even bankruptcies.

Major Challenges/Risks

Economic Market Prediction:
Predicting whether the economy is going to grow, stay flat, or recess (or depress) is the first challenge, as that’s a leading indicator of credit markets.

Credit Market Prediction:
Based on the projected economic changes, predicting the base and prime rate changes, availability of credit, and the future cost to your organization and your primary suppliers.

Alternative Credit Sources:
If your primary sources are projected to become considerably more expensive or restrict credit access, can you identify alternate sources? Moreover, how much will those cost, how long to establish the relationships, and how reliable will they be?

Alternative Credit Arrangements:
If right now you are just using loans or lines of credit, maybe you need to consider early payment discounts, invoice factoring, or alternative supply chain based credit arrangements.

Final Words

Credit conditions depend heavily on economic conditions, so this is yet another reason you need a good economist.

Primary ProcureTech Concern: Managing Digital Fragmentation / Digital Transformation

As per our previous concern on Technology Transformation, it’s time to be digital, but with digitization comes digital fragmentation, especially when you don’t fully understand what you’re doing.

Why?

Digital fragmentation increases the risk of IP/cyberattacks (which is one of your top risks) as each fragment presents its own unique weaknesses and opportunity for attack. Moreover, it explodes the tech execution support required and increases one of the largest barriers to organizational success.

Digital transformation is also a concern because organizations know we have reached the age of digitize or die, but the digitization project failure rate is at an all time high of 88%+ (and 95% if it’s AI-based for the sake of AI) and every digitization effort to date has just resulted in more digital fragmentation. (To the point that the average mid-size organization has over 600 SaaS subscriptions and some have over 1,000.)

Impact Potential

The impact potential depends upon the degree of fragmentation. How many software applications? How many different hosting platforms? How many data pools? The impact of data fragmentation can be low if there are a relatively small number of software applications, they are all AWS hosted, and there’s only one data warehouse/lake/lakehouse. Or it can be extremely high if there are 1,000 SaaS applications, they are hosted on half a dozen cloud stacks (AWS, Azure, Google, IBM, Oracle, and Salesforce), there’s a data warehouse/lake/lakehouse for each of the divisions, and so on.

Major Challenges/Risks

Cybersecurity
Every one of your SaaS applications provides an entry point into your organization if hacked. Every cloud provider provides multiple entry points if hacked. Your data warehouses provide a huge amount of data that can be used against you. These hack points are in addition to all of your internal servers / on-site applications, employee laptops and smart devices. An average organization these days is a cybersecurity nightmare and a hacker’s dream.

Data Integration
Chances are all of your applications have their own data models, own unique entity ids, and own standards for data access. Integrating your data across applications is a nightmare, forcing integration through data warehouses/lakes/lakehouses, which in turns creates a data replication and synching nightmare.

Data Maintenance
Not only is there the synching issue from the replication used to support data integration, but less used apps means there are less checks and updates for the critical data they are the master applications for, and data quickly becomes stale and out of date. And employees depending on that data and accessing it through the lake don’t know that, and can make bad buying and partnership decisions based on that.

Final Words

Managing digital fragmentation is not easy. In fact, it’s a nightmare because most organizations don’t have, and never had, Master Data Management (MDM) or a Master Data Governance (MDG) strategy.

Primary ProcureTech Concern: Economic Downturn & Deflation/Recession

There have been recessionary fears for the last two years. They are not going away, because most countries are teetering on the brink of a major recession if not a depression!

Why?

This is a significant concern because it contributes to the top risk of spend pressure because economic downturns always result in job loss and a drop in consumer spending as many consumers have to tighten the belt. And this, of course, contributes to the #1 joint risk of rising cost/spend pressure.

Impact Potential

The impact potential is dependent on how bad the downturn is, how long it lasts, and how global the downturn is. It can result in anything from a slight drop in sales (if you are in a mostly recession proof business and have one of the most affordable price points) to a massive drop in sales if you’re selling “luxury” goods to average consumers who, being unemployed, have to cut all luxury products from their purchasing.

Major Challenges/Risks

Prediction
When will the next downturn hit? How long will it last? How bad will it be. Right now the markets, and the US in particular, are defying all logic. Trade wars usually depress markets. Considerable over-inflation (which is the case in AI right now) typically leads to rapid depressions when the myth fails to become reality.

Detection
Detecting when it’s starting. When it’s not just a temporary blip, but when a downturn, whether a shorter one (of a few months) or a longer one (of a few years) is starting and when your organization should be adjusting its operations and strategy.

Planning
Just like you should have mitigation plans for significant risks, you should have mitigation plans for the downturn, which might involve shifting or changing product lines, pausing all expansion efforts, putting hiring on hold and planning for attrition (as people retire or contracts end), and even reducing operations with respect to production and/or support. It might also mean, for an international organization, shifting focus to different markets.

Final Words

The nature of today’s markets that allow rampant over investment without sufficient regulation ensures that recessions are inevitable. Your job is to predict them, and this is yet another reason you need a top economist.

Primary ProcureTech Concern: Geopolitical Uncertainty

As Koray Köse would be quick to point out, trade is dependent on politics, and with politics comes geopolitical uncertainty.

Why?

Geopolitical uncertainty is a huge concern because geopolitical uncertainty often results in instability of supply and cost and contributes to the three highest risks: rising cost, supply shortages/constraints, and regulatory compliance. In addition, it also strengthens the one of the more significant barriers to success: category/market complexity.

Impact Potential

Geopolitical uncertainty often leads to sanctions, port shutdowns, border closings, and sometimes the complete termination of supply lines. It can also lead to product, factory, and bank account and also asset seizures. All of these impacts are significant. Best case scenario, it’s just millions in losses, the organization can afford it, and keeps going. Typical scenario, major interruptions, if not termination, of product lines; very unhappy customers; significant, ongoing, losses; and possible closure of divisions or loss of markets. Bad scenario: one of the only sources of a key rare earth or technology component becomes unavailable, the source can’t be sufficiently replaced, and your main business line is terminated. Worst case scenario: a regime change seizes all of your assets in a country, terminates your supply line, indicts your senior executive in the region for treason, and your business is terminated.

Major Challenges/Risks

Event Monitoring: monitoring and detecting events that not only signal that a significant geopolitical event has taken place that is likely to interrupt your supply chain but also events that signal that a significant geopolitical event might be coming. For example, polls a short time apart that signal a rapid shift in political leanings (to the far left or far right) can signal a major shift in the next election. Massive, violent, protests and riots can signal a possible uprising. Unsanctioned military operations can signal an attempt to overthrow the government. Detecting the right events is key to making the right predictions.

Impact Analysis: detecting an event is one thing. Predicting a likely outcome is another. Determining the extent of that outcome can be harder still. And, finally, determining the full, long-term, impact on the organization is often extremely difficult, as some assumptions will need to be made in each step of the reasoning, and the wrong one will lead to the wrong conclusion.

Final Words

Geopolitical uncertainty is a huge concern because you can never know for sure what is going to happen, but you need to have a good idea if you want to prepare. So you need to ensure you have access to a trade expert as well as an economist.