Are Procurement and Logistics Executives Aligned When Faced with Current Supply Chain Challenges?
Procurement and supply chain executives are on the “same team” – and in general, a recent study conducted by the SCRC and GEP suggests that there is strong alignment between the two functions when it comes to prioritizing lower risks and reducing uncertainty in supply chains. Both procurement and logistics are aware of the increased uncertainties arising from COVID outbreaks, labor shortages, port disruptions, and prioritizing lowest cost suppliers, focusing on financial outcomes over customer priorities, and reducing financial risk and uncertainty in decision-making. There is also alignment around carrying enough inventory to meet customer needs, a reversal on the traditional policy of using “just-in-time” inventories to meet demand on an as needed basis.
However, there also appear to be some areas of decision-making on the horizon where procurement and supply chain executives are beginning to diverge in their strategic decision-making. These diverging areas are not yet significant enough to be deemed problems, but are indicative of the fact that there are possible disagreements on the horizon that may arise.
First, procurement and supply chain executives are beginning to disagree on whether the enterprise should begin to reduce reliance on Chinese and ASEAN suppliers. Similarly, there is disagreement about whether procurement should be prioritizing suppliers that are the lowest price, but perhaps not the lowest “total cost”. This misalignment is related to supply chain executives who are beginning to emphasize the need to focus on customer order fulfillment over other priorities, and to begin to give preference to domestic suppliers to improve working capital and create more reliable deliveries. These areas of possible disagreement may be occurring because of the different priorities. Procurement is often rewarded on the basis of lowest price, which often involves sourcing from low cost suppliers, but which may not include transportation costs. Supply chain executives often “own” customer order fulfillment and transportation costs. The past few months have resulted in massive increases in transportation costs, as well as increasing government pressure to source from domestic suppliers as part of new legislation being proposed by the Biden Administration. For instance, this year’s National Defense Authorization Act policy bill is almost certain to include amendments forcing the Defense Department to improve its understanding of who sells what parts and equipment to the United States military, with the broad aim of reducing dependence on Chinese sources.
In general, there may be movements to begin to develop new logistics and sourcing strategies, given the massive problems that have occurred with respect to supply chain shortages, as well as escalating raw material prices. For instance:
- Consumers are finding that everything from appliance parts, bicycles, and other products are in short supply. Post-pandemic spending is booming, but consumers are discovering empty shelves in many retails for goods they’ve come to expect are readily available. The latest CPI increase reflects a 5% increase from a year ago, the highest annual inflation rate in 13 years.
- Demand for agricultural commodities such as soy oil are reaching record highs, causing prices to spike for many goods including hobs, gasoline, diesel, crude oil, corn, copper, coffee, and others. Grocery manufacturers are seeing shortages and price hikes on wheat, corn, and many other commodities
- Rubber shortages will occur likely as a result of poor harvests, Chinese investor futures cornering the market, and a lack of investment on the part of Singapore bankers.
- Increased steel prices have added an average of $515 to the cost of an average US light vehicle, as have the cost of aluminum used in production products
- Chinese operators are in some cases increased prices or halting operations, and are in some cases refusing additional orders due to capacity limitations due to higher raw material costs.
- Semiconductor lead-times have gone from several weeks to six months or more; automotive companies have been shut down due to lack of chips. This has prompted Intel and TSMC to begin development of fab plants in Arizona.
For this reason, there are arguments to be made that local sourcing can increase the speed of working capital as a primary performance outcome. And the older brother of speed is visibility. To move material faster you need of visibility, as well as the right relationships with suppliers in the chain. Convergence of priorities comes together in the variable of speed: customers want their products faster (next day), contracts reward speed of execution and on-time delivery, and procurement is more flexible and able to coordinate when lead times are lower.
As an example of how delivery and costs are intermingled, companies are paying up to $29,854 for shipping a single ocean container, including an added charge for delays in handling the box, compared to a pre-pandemic average container cost of $4804. One wholesale manager noted that “we are focused on making ourselves a very attractive shipper” to ensure it can move its goods as needed. This means getting truck drivers in and out of the company’s facilities quickly and not tying up carriers’ equipment, minimizing wait times, and seeking to get drivers back on the road in 30 minutes or less. “Price is important, but capacity is even more important” notes the manager. This example illustrates how delivery capabilities are taking precedence over price, but is also interwoven with the total cost of ownership, as simply getting materials moving quickly and reducing transportation costs becomes a critical strategic priority.
The full study results of the SCRC/GEP report will be released in 2022.