Introduction
Let’s begin by taking a case in point- It is March of 2021, and one of the largest container vessels has become impaled on the Suez Canal. It takes hours to see the global supply chain begin to unwind like a strand of thread.
In the case of certain companies this was devastating. Belt lines came to a standstill. Ordered products were not delivered to customers. However, what attracted me were organizations that barely missed a step. They had alternative suppliers in place, alternate routes to their destinations charted, and contingency plans that automatically sprang into operation.
Luck was never the difference between the survivors and the casualty, it was a complete change in their procurement approach. These businesses were now past the cost-cutting fetishes to establish the truly resilient supply chain management system.
The Unseen Expense of Cost-Only Thinking
I have seen hundreds of procurement departments burn their fingers on the so-called spreadsheet optimization, of the insatiable pursuit of the lowest unit prices not thinking of the greater good. That was then when supply chains were predictable but that was back in the old days.
According to McKinsey research, disruptions of supply chain that take a month or more have become the norm as they happen on an average of every 3.7 years. However, the majority of procurement departments continue to conduct their activities almost without expecting any problems.
A recent project I have undertaken was that of an automotive firm that has centralized semiconductor sourcing to three suppliers within the southeast Asian region, all within the 50-mile radius. The savings in cost were good on paper. Then the COVID lockdowns came and their production line remained idle six weeks when competitors who had diversified supply bases continued to operate.
A study of 827 events of supply chain disruption discovered that the long-run stock returns of impacted companies was on average -40 percent. According to McKinsey, organizations lose 45 percent of annual profits in 10 years due to disruptions.
The loss of expenses in the name of resilience is a self-defeating policy.
What Is Supply Chain Resilience?
Risk management is not the only thing that supply chain resilience can do. The prevention of known problems is carried out by risk management. Resilience creates mechanisms that assimilate, adjust to and recuperate both foreseen and unforeseen shocks.
The concept of resilience works in three dimensions:
- Robustness implies that when there is a failure of something there are back up systems that will allow you to continue running.
- Flexibility will allow you to change direction, change vendors, re-ship, re-assemble products on demand.
- Transformation means disruptions are taken as a chance to transform and come out better.
By offering suppliers real-time visibility, automated risk monitoring, and real-time rapid response decision support, modern procurement software Supplier Relationship Management (SRM) platforms can support all three.
The Resilience Strategy Procurement Software
Overcoming Perception Barriers
The majority of procurement teams are familiar with their direct (Tier 1) suppliers but are not familiar with Tier 2 or Tier 3 suppliers. Once a Tier 3 supplier gets into trouble, the effect spreads out like a ripple before you know.
State-of-the-art procurement software visualises whole supplier networks. One of the pharmaceutical companies involved in such mapping had predicted disruptions in raw materials six months ahead before they would affect supply of Active Pharmaceutical Ingredients. When shortages struck competitors went scrambling, this firm had backups.
Smart Supplier Diversification
More classical diversification implied the division of orders: 40 percent with Supplier A, 35 percent with B, 25 percent with C. It is as much like having three banks holding money in the same vault.
It takes knowledge of concealed correlations to do real diversification. Contemporary systems evaluate the suppliers based on geographical exposure, financial status, potential to operate, and adherence to regulations. They reveal some hidden ties, suppliers who seem to be independent but rely on the same upstream resources.
A Fortune 500 manufacturer had assumed that they had diversified sourcing of rare earth by having fifteen suppliers in four continents. All that was traced was to three mining operations with the aid of software. A single flood would have paralyzed the whole chain.
Automated Risk Monitoring
There is no rest of supply chain risks. The political tensions are going off. Nature is unkind and so to speak unsought after. The balance sheets of suppliers decline within weeks. Human analysts are not able to trace these variables in hundreds of suppliers.
The procurement software combines news feeds data, disclosed financial data, weather, regulated filing data, and social media sentiments data. Machine learning identifies trends that analysts would be months to identify.
The unrest chatter on the platform of a technology company was detected six weeks before strikes hit a supplier of utmost importance. When competitors were experiencing disruption, this company had prepared alternatives.
What Can Procurement Software Do to Achieve Competitive Advantage Over the Long-Term?
Improved Work in a Disrupted State
When disruption hits the industries, the resilient firms succeed as the competitors fight. In the initial stages of the COVID, strong organizations were their suppliers of choice since they did not fall. There are several relationships that are still intact.
Better Financial Security
Resilience is not a free concept. It requires additional inventory, more contracts, monitoring infrastructure. But profits justify the expenditure. In downturns, the total shareholder return difference between strongly and weakly resilient firms (75th percentile and 25th percentile) grows by almost 30 percent.
Innovation Capacity
Once procurement departments cease to put out fires, they work on value creation: innovation at the supplier level, sustainability, digital transformation. The resilience provides space to the upside.
Maximum Resilience Impact: Implementation of Procurement Software
- Full Supply Chain Mapping: Map software to comprehend immediate suppliers and how they are connected to each other at different levels.
- Full-scale Risk Surveillance: Establish warnings on the state of the finances, regulatory developments, political turmoil, weather risks, and cyber risks.
- Scenario Planning: Stress-test supply chains to various disruption scenario conditions. Know weak points beforehand.
- Supplier Partnerships: Transactions are out. Disclose share risk information and organize response strategies.
- Continuous Optimization: Have a routine review of the institute. Update risk models. Hone strategies with changing environments.
What’s Next for Procurement Resilience?
Artificial intelligence will identify risks and recommend mitigations. Digital twins will model complete supply chains in real-time. Blockchain will offer immutable, auditable traceability.
It’s not the technology alone. Surviving companies will make resilience their core competency, not their cost center.
Conclusion
The days of “design for minimum cost” purchasing are over because the hidden costs of disruption have become untenable. Those that only optimize for price will continue to be surprised again and again while their flexible competitors navigate stormy seas.
Today’s procurement software provides the right toolset but cultural shifts are required. No more viewing the procurement department as a cost center but instead a strategic capability that guarantees business continuance while giving competitive advantage.
The problem is not whether your supply chain will be upset, that’s a certainty. Will you be ready when that happens?
To learn more about how digital procurement will transform your supply chain resiliency approach, read GEP’s vision of the next decade of procurement.
Frequently Asked Questions
How does procurement software enhance crisis supplier relationship management?
It provides a crisis command center with automated communication workflows, real-time alternate capacity tracking, and immediately activatable contingency plans. You’re not scrambling mid-crisis, you already know available moves.
What is the difference between ERP systems and procurement software for business resilience?
ERP software are general purpose tools that manage finance, HR, and comprehensive procurement processes. Specialized procurement software offers specialist functionality: comprehensive supplier risk tracking, multi-level mapping, and sophisticated analytics that cannot be rivalled by ERP modules.
Can small businesses benefit from resilience-focused procurement software?
Certainly. Smaller companies feel disruptions more due to absence of buffers. Cloud platforms today make resiliency capabilities affordable without enterprise scale investments.
What is the time horizon of observable progress of resilient adjustment?
Improved view and advance warnings become apparent in 60-90 days. Actual resiliency, network maps, integrated monitoring, scenario thinking, becomes apparent after 6-12 months. Financial effects become defined after 12-24 months by preventing disruptions.
