Procurement still lacks control over supply chain risks

In view of the numerous supply chain calamities that have occurred in the past year, purchasers’ low degree of maturity relating to risk management is extremely worrying. That is a key conclusion in KPMG’s global survey of almost 600 procurement professionals. Only four percent of respondents from the manufacturing sector have supply chain risks completely under control and a further 16 percent almost do. In the retail sector, meanwhile, not a single respondent claims to be in either of these two categories of risk management maturity.

“I suppose it’s logical that manufacturers are confronted with supply chain risks,” reacts John Tros, partner at KPMG Management Consulting. “The retail sector still regards many products as commodities that can be obtained anyhow. While Unilever is working to build long-term relationships with cocoa farmers, for example, retailers are not doing the same for their private label products. Retailers try to financially hedge the risks for fast-moving products. But that doesn’t assure them of receiving deliveries if the supply chain is disrupted. Retailers are still under the illusion that the balance of power is in their favour. Large retailers shift their supply risks onto their suppliers. But retailers should really try to ensure that they become the preferred customer of choice for their suppliers, instead of simply driving the price down by 10 percent every year.” Tros is referring to the fact that suppliers can choose from a growing number of alternative channels, such as Zalando, Amazon and, in addition to traditional retailers.

Anglo-Saxon vs. the Rhineland models

KPMG’s global survey clearly demonstrates that procurement in the USA and UK is ahead of that in mainland Europe, while procurement in Asia has the lowest degree of maturity. Tros: “When it comes to procurement, there is an essential difference between the Anglo-Saxon and the Rhineland models. In the US and the UK, procurement is viewed strategically as a tool for sales growth. In continental Europe, on the other hand, it still tends to be about contractual savings. In Europe it is still a case of ,‘We are the customer and you are the supplier,’ whereas in the US purchasers say, ‘I need to generate more growth. Can you help me?’ You can compare it with innovation: in the US, companies are much more open to sourcing innovation from outside the organisation, whereas European companies tend to want to develop everything themselves. In Asia and Japan, incidentally, companies take yet another approach to their suppliers. There, they are prepared to share both risks and knowledge.”

Financing the supply chain

The concept of supply chain finance is relatively new territory for procurement. According to KPMG, a growing number of retailers have started to consider reducing their payment period through supply chain finance. “I don’t believe that supply chain finance is the only answer. Procurement needs to look at the whole supply chain. Supply chain finance is just one of the tools.” The general trend is to pay suppliers later. “Whereas I believe it to be important that suppliers have sufficient cash flow. Manufacturers are quicker to notice when their suppliers get into financial difficulties. Retail is still basing purchasing decisions on the lowest price. Look at France, where farmers sometimes have to wait six months to get paid and have recently revolted against the retailers.”

To Tros, the procurement function is noticeable by its absence in the Sales & Operations Planning (S&OP) process. “Within many companies, S&OP is purely an internal discussion between operations and sales about matching supply and demand. Procurement’s absence in this process is linked to its limited strategic role within companies. Generally, procurement continues to be focused on driving purchasing prices down or optimising a purchase-to-pay process, whereas that’s not always what the overall business immediately needs.” Tros advises procurement to approach category plans from the end customer’s point of view, because then the rest of the company will sit up and listen. Procurement needs to seize supply chain risks as a reason to alter its behaviour, to focus more on creating value rather than merely achieving cost savings.

> Download the KPMG report The Power of Procurement here (PDF)