Procurement: New risks and new roles ahead
Emerging supply and value chain risk factors are changing the expectations for procurement leaders.
Global commerce may be slowly recovering from the effects of the pandemic, but it is by no means a return to business as usual for today's supply chain. Lingering disruption can be expected for the foreseeable future, and this, along with the convergence of several fast-evolving trends, has made the chain more vulnerable and harder to protect.
It has also changed the way organizations assign accountability when things go wrong, and procurement leaders need to understand how that impacts their role. With increasing frequency, the function that sourced and onboarded the supplier is held accountable when poor or unethical performance disrupts the chain, impacts the organization's reputation or incurs regulatory penalties.
Here are some of the trends that we are paying the closest attention to as we support the supply chain, and especially the procurement function.
Long-term pandemic impact
The lasting effects of COVID-19 on global commerce have yet to be determined, but in the short term, the pandemic spurred greater diversification of global supply chains. As supply lines broke in multiple places, companies scrambled to mend them by sourcing alternative suppliers and creating redundancies. Adding to the burden of managing a more complex supply network is the fact that these supply chains simultaneously became less trustworthy. According to the Organization for Economic Co-operation and Development, emergency procurement processes introduced more substandard products and corruption into the chain. For procurement, the situation calls for an integrated approach, new tools and external data that enable the function to evaluate and monitor a fluctuating chain that relies on a far larger volume of suppliers to achieve stability.
Outsourcing has been a rising trend for years because of the efficiency gains, cost advantages and access to specialized skills that it enables organizations to benefit from. Not even the pandemic could reverse this trend: even as the outsourcing model faced unprecedented stressors, reliance on outsourcing increased during 2020 for many industries. However, a tumultuous year underscored the need for greater vigilance around the vetting and monitoring of outsourcing partners across multiple tiers. Procurement must now include the evaluation of a wider range of risk vectors, including political, environmental, governmental and regulatory, when selecting these partners.
Regulations around corruption, fraud, export controls and sanctions, labor laws, customer privacy, data security, and health and safety have multiplied in recent years. This has forced organizations to take responsibility for compliance and oversight across multiple supplier tiers, and with many regulators now stipulating the need for ongoing and continuous oversight, it's no longer a "one-and-done" activity. The US Department of Justice, for example, expects the supplier management process to cover the entire supplier lifespan and create a permanent record of rejected or terminated third parties to ensure they are not inadvertently re-engaged at a later date. Similarly, Germany's Supply Chain Act requires companies to draft and adopt a policy statement on human rights, conduct risk analysis, engage in risk management and implement transparent public reporting regarding both direct and indirect suppliers. In this highly regulated environment, procurement leaders who continue to focus on immediate cost savings over careful due diligence could find themselves saving the organization $5 million only to incur hundreds of millions in penalties.
Customer and investor priorities
The ethical integrity of the supply chain is becoming as important as its operational integrity. People want to do business with companies that embody ESG principles, and those principles need to extend to the furthest tiers of its supply chain. When a company's suppliers engage in unethical or damaging business practices, it is the company itself that takes the blame and sustains the reputational damage. Discovery of corruption, bribery, exploitation, cruelty or environmental abuse have an immediate and devastating effect on a company's market viability and capitalization. In this hyper-vigilant environment, procurement must support vetting and monitoring processes that enhance supply chain transparency and ensure ethical practices across supplier networks.
A new approach to managing risk
As risk factors proliferate and regulatory oversight increases, procurement must rethink the approach. In a complex and volatile world, procurement is no longer just about commercial value. It's about protecting the organization's reputation, resilience, competitive position and market share.
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
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