Category Archives: State of Procurement

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.

Primary ProcureTech Concern: Tech Transformation Delays/Obsolescence

It’s a digital world. Adapt, or fade away.

Why?

It’s a digital world but, as we have repeatedly explained, it’s not AI. It’s not people using AI. It is people who embrace and properly use the appropriate digital tools who will win. (See our prior article.) Therefore, it’s organizations that embrace these people and give them the right tools who will win.

As a result, acquiring these tools and getting them in the hands of capable employees is a top priority. Especially since an organization knows that their competitors understand this as well and have the same goals — get tech capable employees, let them select and acquire the right tech, and get an edge. As a result, delays are bad. Obsolescence is worse.

Impact Potential

Significant. Everything is digitized these days. Not being able to do anything digitally is a significant drawback, if not a roadblock. And not being able to do it as efficiently and effectively as possible is a detriment. Impacts can range from:

  • inefficiency where tasks require more headcount, more time, and more overhead
  • ineffectiveness where analysis doesn’t get done, bad decisions get made, and opportunities get lost
  • insolvency and we’re not exaggerating here because if enough of the risks materialize, costs shoot up, sales drop down, supply becomes unstable, and the organization can’t operate lean and mean, it could be the first in its market to file for bankruptcy

Major Challenges/Risks

TQ: Technical Quotient: in order to understand both the technological needs of the organization as well as whether or not a specific piece of software will support the necessary processes requires a significant amount of technological knowledge, especially considering all of the marketing claims that an average individual will have to wade through to get to the facts

Technical Support: in order to ensure that the software can be appropriately implemented and utilized, you will need appropriately skilled individuals who can support platform integration and implementation and project assurance … and technical support is a major barrier

Technology Market Knowledge: you need to keep up with emerging technology, separate the wheat from the chaff, and identify when an emerging technology or market offering is about to make your current platform obsolete. (And this goes far beyond just adopting random “AI” based on vendors claim, it requires rigorous evaluation to make sure the technology is appropriately reliable and scalable.)

Final Words

It took 30 years, but we’re finally Being Digital. Either you accept it and modernize, or fade to black.

Primary ProcureTech Concern: Supplier/Supply Chain Resiliency/Continuity

As this is one of the top risks and top barriers to success, it’s no wonder it’s also a top concern.

Why?

Given that supply shortages/constraints have consistently been identified as an organization’s top three risks, and can easily result from geopolitical uncertainty, economic downturns, and even high inflationary pressure, as well as decrease the category/market complexity barrier if key suppliers suddenly exit the market, this should come as no surprise.

Impact Potential

Impact is very straight forward, and summed up nicely by the Arrogant Worms in 4 words: No Sale, No Store. If you don’t have supply, you don’t have product. If you don’t have product, you don’t have anything to sell. No sale, no revenue. No revenue, no organization.

Major Challenges/Risks

  • supplier stability: ensuring they are legit, financially stable, and operating sustainably
  • supply chain stability: country access, operational ports, secure carriers, and so on
  • raw material availability: mine stability, crop protection, etc.
  • financial security: ensuring you have the right agreements in place to ensure supply chain financing as needed
  • multiple relationships: you need primary, secondary, and alternate sources of supply — and for certain materials or products that are rare or unique or bought in low quantity, this can be extremely hard to arrange

Final Words

Supply chain resiliency is in doubt, but supply is crucial, so you need to figure it out. Re-read our barrier and risk pieces and dive in.

Primary ProcureTech Concern: High Inflation Pressure

The two decades of low inflation we experienced in the noughts and tens are two decades we won’t experience again in our lifetimes. Thus, this is a significant concern.

Why?

More precisely, this is a significant concern for two reasons. The first reason is that if costs rise too much, the cost of acquiring the necessary materials and services to make the products and/or deliver the services you sell rise, as well as the cost of MRO and day-by-day operations. If you’re in a thin margin business, inflation pressure is thus a significant concern.

Moreover, this is also a significant concern because wages never keep up with inflation (because, if they did, we wouldn’t see so many port and logistics strikes every time cost of living skyrockets while wages remain flat or indexed against an outdated cost of living increase as of the last contract negotiation that occurred two to five years ago), and if the inflation leads to substantial cost of living increases, the relative share of consumer spending that will be spent on the organization’s products and services will drop, giving them less cash on hand to deal with their rising costs, increasing the spend pressures of their top joint risk.

Impact Potential

The impact is straightforward.

  1. If costs rise too much, not only does profitability fall significantly, but after a point, so does the sustainability of business operations. Cuts could hav to be made with devastating future conferences.
  2. If sales drop too much, critical revenue stops coming in, and the same problems arise.

Major Challenges/Risks

Inflation Projection
Predicting expected inflation over time based upon typical trends as well as from the impact of significant economic events that can cause rapid increases in inflation.

Impact Mitigation
Finding ways to mitigate the expected impact through alternate sources of supply, currency exchanges, operational efficiency improvements, investments, etc.

Final Words

This is a tough nut to crack, especially for Procurement. The organization needs to hire a top economist to help it predict and prepare for inflationary times.