A localised supply chain could minimise disaster risk
Over the past few years, procurement has been dominated by concerns about risk management and minimising supply chain vulnerability, following the mounting risk of natural disasters worldwide.
The devastating effect of natural disasters has been underpinned in the collective consciousness of big businesses following supply chain disruptions in the aftermath of the 2011 Tōhoku earthquake.
Chaos following the earthquake had a devastating effect on the business of automotive manufacturers, which saw the major player Toyota Motor Corp lose out on sales of it’s Prius model, which is manufactured in Japan alone.
In addition to specific companies losing out on profits, Japanese plants which supply engines and motor parts were also affected; causing disruptions in assembly plants worldwide which suffered from a knock on effect. In instances where these plants were the only source, this caused a devastating loss of profit in companies worldwide.
“Clearly there are disadvantages to sourcing products from countries that suffer from extreme weather conditions, especially when supply is so geographically focused,” explained Dave Alberts, Director of Crimson &Co, a leading end-to-end supply chain consultancy group.
This disadvantage is something that the vast majority of companies are vulnerable to. In the UK alone, the average manufacturer has almost 190 suppliers, with almost 100 percent of manufacturers supplying some materials from overseas, according to a new study by the EEF. Currently, over half of manufacturers source from Asia and nearly as many source from the US.
One way that companies are avoiding the disadvantage of increasing environmental disruptions is by bringing their supply chains closer to home.
The latest approach to risk minimisation in companies is to introduce local or in-house production of crucial parts, particularly in the manufacturing sector. In order to maximise resilience to disasters and build flexibility in their own operations, 40 percent of the 150 UK manufacturers are bringing their supply chains closer to home, according to a study by the EEF.
Suppliers close to home
Whilst global sourcing offers cost saving opportunities, the repercussions of natural disasters have highlighted the weaknesses of specific dependencies, leading to an increased focus on more localised or in-house production of crucial materials.
According to the report, named Be Prepared – Monitoring supply chains; Maximising Resilience, two-fifths of the 150 respondents had brought production back in house as a response to supply chain volatility, whilst a quarter had increased their use of local suppliers in order to improve their supply chain performance. These two measures have resulted in lead times being reduced and greater ease of access when it comes to quality control.
Named large companies are more likely to bring production back in-house, due to a greater access to resources, plus more space and capabilities. Small companies are more likely to turn to local suppliers.
According to an interviewee within the report, there are four key benefits to bringing production in-house: quality improvements, reduced lead-times, increased control and cost.
Moving production in-house minimises supply chain risks, however, companies often have to invest in additional premises and workers, which eats into profit margins. In addition to this, many companies who would have liked to use more local suppliers were unable to do so due to a lack of available capacity.
Advocates of localised sourcing also highlight the positive environmental effect of reducing transportation. In an interview with BusinessGreen, a spokesperson from the EEF suggested that a move to source goods locally could also help businesses reduce carbon emissions from transporting goods, while strengthening manufacturing capacity in the UK.
"If companies are bringing production back in-house or using locally sourced products then they aren't going to be transporting goods from overseas, helping to reduce transport costs and emissions," he said
Investing in the local area
Anglo American, one of the world’s largest mining companies, is a major advocate of putting more resources into the local area. In an article written for The Guardian, a representative of the company outlines a ‘strong business case’ for placing key suppliers close to operations.
Speaking from the company’s own experience, Linda Wedderburn from Anglo American highlights the greater efficiency that can be produced by investing in local suppliers, in addition to lowering logistical costs and ensuring reliable access to goods and services.
With a new strategy which invests in supplier development programmes, the company have also expanded their enterprise development programmes to ensure there are more businesses to buy from.
“This collaboration has helped our supply chain teams understand the realities of the communities in which we operate, and raised the visibility of local suppliers with the people making the purchasing decisions,” explained Wedderburn.
For companies which rely on global supply chains, a more localised approach to procurement could be the answer to greater flexibility and control in their supply chain. It is important to see beyond target meeting, and look into the economic development of local communities, which is likely to positively contribute to the long term success and reliability of the supply chain.
EY and Harvard Law discuss barriers in Contract Management
Contract management is a crucial discussion for procurement professionals as negotiations require a more specific outcome. However, some organisations are experiencing significant barriers to developing their contracting processes. Ernst & Young and Harvard Law School Center have discussed survey results in relation to the current state of contracting and explain where the issues arise.
The Legal Profession survey (part of the 2021 EY Law Survey) highlights the perspectives of 1,000 professionals from across the globe in law, procurement, business development and commercial contracting.
Out of all the major companies surveyed, over half of them say they are experiencing significantly reduced revenue and are missing out on important opportunities due to poorly managed contracting processes.
Some of the key findings from the survey:
- 92% of organisations in the survey said they plan to transform their contract handling procedures.
- 98% of respondents said they face critical barriers in the process of developing contract management.
- 38% of organisations said they have tried and failed already to implement a better contract management procedure.
- 57% said they had experienced less positive revenue due to inefficient contracting systems.
- 50% of respondents said they had missed profitable business opportunities.
Kate Barton, Global Vice Chair, EY, has expressed her opinion on the survey, “Revenue growth is a fundamental goal for any commercial organisation and effective contracting processes play a crucial role in making that possible. Contracting teams around the world know the value they can bring, and they are making real efforts to transform, but the survey brings into sharp focus a whole range of obstacles that they must navigate if they are to make the improvements they are aiming for.”
What will organisations need to address to develop their contracting methods?
Many organisations are under pressure to reduce costs, specifically contracting professionals. This is something that nearly all of the survey respondents will be looking to do in the next two years, while a third of larger organisations aim to scale this to a 30% reduction in contracting costs.
There is a certain lack of clarity among organisations as to who is responsible for contract management. It is unclear to most how the contracting process should be managed; perhaps this could be because it involves an agreement between various stakeholders. Around 59% of legal departments believe they have the leading role, while a similar number of contracting staff also share this view. 39% of business developments professionals believe they are to hold the decision-making power.
Utilisation of Technology
There seems to be a lack of capability among organisations to analyse and manage contracts. According to the survey, around 70% of organisations have a technology strategy in place to manage contracts; the majority still lack the necessary data to utilise it to full capacity. This is likely caused by insufficient knowledge for implementation that is likely a direct result of a skills shortage, which 34% of organisations have reported as an issue that limits them.
Insufficient Contracting Processes
A lack of a defined contract drafting process will significantly limit how effective the contract will be. Global Legal Managed Services Leader at Ernst & Young, John Knox, explains, “the importance of getting contracting right cannot be underestimated.”
Around 49% of survey respondents say they don’t follow a defined procedure, and 78% say they do not have a system for monitoring contractual obligations.
Knox says, “with the right transformation efforts focused around people, process and technology, contracting can actually become a business enabler and differentiator. The survey shows that one way in which organisations aim to tackle these challenges is through working with subject matter leaders and external providers.”
Meanwhile, David B. Wilkins, Lester Kissel Professor of Law, Vice Dean for Global Initiatives on the Legal Profession, and Faculty Director of the Center on the Legal Profession, Harvard Law School, says, “Contracts are at the core of every business. They determine how growth happens and how risks are managed. It is therefore absolutely crucial that organisations have effective systems and processes to manage every aspect of the contracting process, from negotiation and execution to termination or renewal, as well as an accurate understanding of the obligations, benefits, and risks across the entire spectrum of their contracts.
For more procurement insights, check out Procurement magazine.