Some while back I posted a LinkedIn Poll on what are the current major contributing factors to Procurement Risk. Many thanks to those that participated.
The feedback from the Poll was statistically as follows:
- Rising Logistics costs as a factor: 40%
- Unspecified Macro Eco-Political reasons: 30%
- Knock on effect from the Russo-Ukrainian War: 18%
- Unspecified operational reasons: 11%
Most voted for Rising Logistics Costs (RLC) as the principle driving risk factor, so let’s devote this article as to why most blame RLC.
- Geo-Political Risk
This dovetails directly with Macro Eco-Political reasons. Logistics costs has risen by 22% since the onset of Covid in 2020. This is further exacerbated by world politics since the beginning of 2022 which has further hiked logistic cost factors for direct and indirect reasons. Any major event predictably does since time immortal. As we know, these prices will rarely if ever fall back to their pre-global defining event levels.
Over several decades supply chains have become globally diverse for the best corporate reason- bigger profit margins. However, most executives rarely comprehend long term Geo-Political Risk.
2. Contingency Planning
This point includes those that voted for the Poll options other than the Russo-Ukrainian War (and would now include the current Middle Eastern conflict). Ineffective or non-existent Strategic Procurement Contingency planning is a major risk component, which should include Macro- Logistics and all its contributing sub factors.
Lots of executives recognise but do not understand how to limit soaring Macro-Logistics costs because they never holistically analyse all the contributing sub- factors into their planning of alternative scenarios when evaluating their Logistics options.
3. Meaningful Supplier and Operational Management
This point can’t be stressed enough. Know what quality supplier you need to be dealing with up front, and where they are, but most importantly do you HAVE them in your supply chain. NEVER make the uninformed mistake of merely taking cost over all other considerations. The name of the game really is due diligence when sourcing and onboarding vendors, and then emplacing an effective regular vendor performance appraisal programme whereby the vendor is graded and categorised against ongoing and current critical criteria. This is on ongoing process that many consider an unnecessary pain, but it is a vital part of meaningful procurement management.
Single-Sourcing Risk – (over reliance on a single supplier). This is a common mistake made by procurement professionals. The considerable risk arises that if anything happens to that supplier or your relationship with, then your supply chain is at risk. Hence the importance of quality due diligence and contingency planning.
Skilling — Having dedicated, competent, skilled team members can’t be stressed enough. This includes the obvious long use of computerisation and the modern use AI tools. NOTHING replaces the Human Factor- I have experienced that way too often over my career.
Regularly courses to upgrade their skills, competence and education is vital. So does complimenting and rewarding them for a job well done. Nothing pays bigger dividends to operational efficiency than looking after the skills needs of your team and showing support and appreciation for their accomplishments.
Production and Inventory Costs – Two of the points that would have been implied under the Poll option of “unspecified operational reasons” are:
- Soaring or uncontrolled production costs can be attributed to rising material costs, insufficient deployment of work floor assets (caused by misunderstanding or not having a strategy on how better to utilise them), equipment age and maintenance, outdated or poor production processes, labour and overhead costs along with a multitude of other contributing reasons.
- Inventory costs are another principal risk factor, especially from a Purchasing and Procurement perspective. The name of the game is always predicting demand patterns, buying, and stocking accordingly, to minimise the cost of inventory. Of course, other minimised inventory strategies also exist such as Inventory on Demand etc. Demand planning should certainly take global eco-political events into their planning for alternative scenarios, along with commodity scarcity and obsolesce.
I trust that this like all my posts are of some use to someone out there somewhere. Should you wish to ask a question, add something, or even disagree with the content, then please feel free to do so.
For those that don’t already know, me as an independent Procurement strategist and Capital Recovery (from tangible asset bases ) specialist. I am always willing to talk about where and how I can add value, so drop me a line or call me, if you feel my unique skills could assist your organisation.
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