Invest now so that digital change does not become a crisis!
15. September 2020

How to develop your procurement from a global supply chain into a flexible value network and be prepared for crises in the future!

Technology industrial business process workflow organisation structure on virtual screen. IOT smart industry concept mixed media diagram.

The Corona-related measures have made it clear to many companies how strongly economic activity is now dependent on global supply chains. Over the past decades, industry and logistics have continued to optimise “just-in-time” supply chains and have almost completely eliminated inventories. Even companies that still generate a large part of their value added themselves have had problems as a result of the global lockdown due to the failure of individual components. Supplies from the Far East in particular could not be delivered on schedule for weeks.
So was it a mistake to push globalisation so far and even outsource important components of your product? Certainly not. Germany has benefited massively from this worldwide networking and delivery of machinery and plant to other countries. Driven by ever increasing cost savings, however, it was forgotten to take the risks, such as those of a worldwide pandemic, into account in planning.
So the current crisis is a turning point that every company should take advantage of to adjust its strategy. The guiding motive for the future is no longer the lowest costs, but rather the constant availability even under uncertainty and the establishment of sustainable structures. The lockdown is therefore a driver for a development that already started before Corona: a resilient design of supply chains towards a flexible network with reliable partners near and far!
In this article I will show which challenges companies have to face with new procurement strategies and how even small and medium-sized enterprises should use new technologies and digitalisation to build flexible and stable value-added networks.
Cost reduction as a driver for outsourcing
In the 1990s, an outsourcing movement began which was mainly cost-driven. Manual production processes were shifted abroad and the transformation from an industrial to a service economy was the subject of intense debate. The pioneer here was the clothing industry, which shifted its predominantly manual activities to production sites in low-wage countries in the Far East at an early stage.
German companies have often shied away from relocating sites completely, which proved to be very valuable, especially in the crisis years 2009 / 2010. The good industrial base with its own research and development activities was increasingly used as a starting point for global market development in regional locations. Nevertheless, there was an increasing dependence on international suppliers, particularly in the procurement area. In the meantime, these had caught up technologically to such an extent that even more sophisticated assemblies could be procured abroad at good quality and still at significantly lower prices.
The new communication channels via the Internet and fast data connections nowadays enable punctual logistics and information in real time – even over long delivery distances. Many processes were so well established that reliable delivery over long distances was taken for granted. The current crisis reveals the vulnerability of this system. In the future, costs will no longer be the only reason for relocation.

Digitisation makes outsourcing of resources necessary
With increasing digitalisation, which accelerates the automation of entire business processes and at the same time places new demands on companies in terms of flexibility, many companies are encountering a completely new problem: a lack of resources. So it is no longer just low-cost purchases, but strategic procurements that drive companies.
Even if companies want to carry out digitisation projects on their own, in some cases they have no access to the number of IT specialists they need, apart from the high costs involved in Germany. On the other hand, the sensitivity of IT issues requires a trustworthy cooperation that goes far beyond a simple supplier relationship.
This becomes particularly clear in the example of software projects. For example, a German company involved in the awarding of an IT project will be looking in India. There are well-trained programmers there, but there are large geographical and cultural distances. Starting with the language, the way of working, the time difference and the understanding of quality. Even English communication between non-native speakers can quickly lead to misunderstandings.
A solution for medium-sized companies can be projects with cooperation partners in Eastern Europe, where the IT specialists often even speak German. The distance to the own location is not so far, so that in case of problems one can easily travel to a personal appointment on site and there is no time difference.
Procurement as a value-added function of products and resources
So the question remains, how can companies source their products and resources in the future? Only in Germany will it not work, but the sole dependence of global supply chains is also not a solution with regard to risk assessment in the event of a crisis. What remains is the establishment of value-added networks that are more than just supplier-customer relationships. We are looking for cooperation partners who are flexible enough to adapt their capacities to current needs. At the same time, the increasing use of new technologies, such as production robots and 3D printing, is reducing unit costs, even for small quantities.
The first important step is to develop a procurement strategy that already includes plans for digital products and digital processes. Central questions should be which preliminary products and resources the company is most likely to depend on. Further aspects are sustainability considerations and, finally, communication within the value network.
The company’s purchaser is thus given an extensive management task which has a value-adding effect in the company. Based on the criteria, he defines the target processes and becomes a network manager within the company, bringing together the right resources within and outside the company.

The challenges of outsourcing
As the simple procurement of products from other countries already shows, the establishment of a value-added network involves considerable effort. This includes not only the strategy process, but also the selection of suitable network partners, investments in production and warehouse locations, and the selection and introduction of digital technology.
This appears to be a dimension that is difficult to grasp, especially for medium-sized companies. This makes so-called “near-shoring” all the more suitable as a solution approach for the more complex procurement processes. Anything that cannot be sourced and stored as a standard product from distant markets should be sought close to one’s own location. This increases flexibility and simplifies communication.
Another challenge is the creation of redundant structures. A value-added network is only stable if there is always an alternative path in case a supplier fails. This means that you always have to develop two suppliers and work with them.
Here again, the clothing industry is a pioneer. Due to the short fashion cycles, many seasonal articles are now produced close to their locations in Eastern Europe or Turkey. Long delivery times by sea are eliminated and fashion manufacturers can react to fluctuations in demand during the season. This flexibility is becoming increasingly relevant in the industry as we are now discussing batch sizes of 1 for Industry 4.0.
What will you start with tomorrow?
I would like to distinguish my recommendations into short-term measures that all companies should implement now in order to remain stable during the crisis:
1. identify the most relevant supply parts in your company and carry out a risk assessment for them from the beginning to the end of the supply chain In doing so, you should mark the critical sections, for which you must find alternative solutions, for example, another supplier or transport route.
2. develop a risk management process that includes rapid identification of problems and redundant safeguards for the most critical parts These should either come from a different region or be produced using a different technology or materials (e.g. 3D printing).
3. build up storage capacity that can be used as a buffer for the critical parts. The risk of failure must be weighed against the necessary capital commitment, or alternative financing possibilities for the stock must be identified.
In the medium term, further investments are necessary:
4. develop a digital strategy that includes not only the digitalisation of your processes, but also new automated production possibilities.
5. look for long-term partners who also have an interest in building a stable value-added network.
6. become procurement as a value-added function in your company and invest in an agile and collaborative corporate culture
Only those companies that think in this direction early on will come out of the crisis well. There will still be some companies in the further course of the possible recession that will get into difficulties and a further lockdown cannot be ruled out, at least in individual countries. The sooner you as a company prepare for this, the better. Are you looking for the perfect companion for this challenge? Then arrange a free 30-minute consultation with me today.