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Strategic Procurement can help you in times of economic uncertaintyWhy Strategic Procurement can help you in times of economic uncertainty

 

At 1.4%, UK GDP growth in 2018 was the lowest since 2012 [2]. The British Chamber of Commerce [3] and leading economists across the UK [4] predict the UK will continue its negative economic outlook, especially if a ‘no-deal’ Brexit is executed. This has worrying consequences, particularly for supply chain management and any agreements where goods or services are delivered from abroad, especially the EU. Organisations could potentially face changing trade tariffs, barriers and delays to the movement of goods and people across borders; all of which threaten the integrity of contractual arrangements [5].

Meanwhile, the gap in the UK’s trade deficit is widening; making trading conditions for UK exporters more challenging. Firms are increasingly reporting that they have to divert staff, money and investment to protect against the predicted chaos of a no-deal Brexit [5]. Brexit is not the only international trade issue affecting the UK economy; for example, the shifting US-China trade relationship has global affects. Because of the uncertain market conditions affecting the UK there has been a sharp drop-off in growth – and this is expected to continue downward by at least 0.2% this year [6].

Regardless of what form Brexit takes, volatility and market uncertainty can be expected to carry-on over the next couple of years. Upcoming changes will bring a host of uncertainty and new complexities in delivering projects according to plan. Both the public sector and private firms will need commercial help from agile, innovative and forward-thinking Procurement and Supply Chain Management professionals that stand by good practice to unlock value through this period of uncertainty. Whatever your role in procurement or purchasing activity, you should begin by asking yourself the following questions – and start to worry if you can’t answer them:

1.  Do you understand the risks to your supply chain?

Potential risks are inevitable in business and how you manage them starts with investing in your knowledge base. Especially in times of market volatility; businesses need to understand where risks originate and how extensive their impact may be. This is not exclusive to international contracts and includes domestic contracts; these suppliers may be using sub-contractors or supplies that will be directly impacted by Brexit.  A wide-reaching assurance exercise is essential to understand the full management, and attitude of, your supply chain.

Internationally you need to be aware of how your suppliers are impacted by their own market’s economic and political health. If they are not prepared for the repercussions of any of the potential risks materialising, how can you be? For example; UK retail companies that shifted operations from Asia to Turkey for ease of transport now must proactively monitor a high-risk country that is in political and economic turmoil. GDP growth was 7.4% in 2017, 3.9% percent in 2018 and is predicted to get worse in 2019 [7]. Many firms are gathering information to inform their understanding of risk – including seeking assurances from Turkish suppliers over how they finance their operations while the currency weakens [8].

An independent and objective procurement professional is usually best placed to do this. By coming in with a fresh perspective they can look at your register of suppliers and any of their sub-contractors as part of their wider supply chain. It may even be sensible for them to audit your suppliers’ sub-contractors. By understanding risks and your rights under the contracts you have with your suppliers, it will help you shape the options and next steps.

2.  Do you manage risks in your supply chain?

After proper identification and clarification, service owners then need to start understanding the principles and nuances, of proactive risk management and allocation. After this you can begin to devise how their services can be better utilised, or adapted, to better mitigate the risks that uncertainty and slow economic growth brings. You will then need to develop the supply chain to meet your needs. This may include changing the contract or amending service levels or even changing aspects of your supply chain.

The UK auto industry has been busy trying to understand and manage Brexit risk – after all the average car has 30,000 parts and many of these come from suppliers in the EU and further abroad.  The BMW Oxford factory will bring forward their summer closure the day after a potential no-deal Brexit [9] for at least a month to help manage the anticipated disruption of short-term parts supply.

Good risk management practice begins even earlier, back at the point of designing and negotiating a contract. In uncertain economies you should seek to share and mitigate risk at each stage, so each party is clear on how they are being managed before contract signature. The UK Government reinforced these principles in a newly released ‘playbook’ to improve how government works with private companies in delivering public services [1], as a response to the collapse of construction services giant, Carillion, which held 450 public-sector contracts until it went into liquidation last year.

In terms of avoiding similar disasters in the future, an independent procurement professional can help ensure that bidders for any critical public service contract clearly set out what their service is and provide detailed resolution planning information. It will allow your organisation to allocate risk to suppliers as early as possible in the procurement process, to put in place appropriate mitigations and help ensure the contract is set-up for success. New standards, ideas and guidance can only be a good thing for government contracts, but it still needs to be put into practice.

3.  Are you confident that you are achieving good procurement practice?

Does every person in your procurement team or function properly understand what good procurement practice is, and what it looks like? Ensuring the processes that deliver value whilst managing risk should be at the heart of what procurement functions do. The risk here is around lack of control. There may be a knee-jerk approach to purchases before an event occurs (Brexit as an example of an event) but such decisions should not sacrifice good practice.

In December 2018, Seaborne Freight was awarded a £13.8m contract to run a freight service between Ramsgate and Belgium. However, there appears to have been little adherence to good practice. There was no publication of an invitation to tender in the Official Journal of the European Union (OJEU) [11], and while OJEU is flexible for disaster related events, on this occasion the challenges got worse. Channel operator Eurotunnel initiated legal action against the Department for Transport, claiming that they should have had the opportunity to compete. The matter was settled out of court, with Eurotunnel receiving £33 million and frequent calls for the Transport Minister, Chris Grayling, to resign.

Particularly while there’s anxiety in the market, there has never been a better time to independently assure your decision making. Few organisations are free from the potential of costly legal challenges, failed delivery and negative exposure. Other organisations may be tempted to make quick decisions before substantial changes are made to legislation around import/export trade deals – however a considered and strategic approach, managed by an independent procurement professional, is recommended.

4.  How important is corporate social responsibility to your supply chain?

In 2008 during the global financial crisis, a study of 100 companies on the Fortune 500 (in both Europe and the United States) found that overall there was significant decrease in their corporate social responsibility (CSR) projects [12]. Typically, organisations will behave more conservatively in times of market volatility – spending less and cutting those costs that are deemed non-essential to the business. If the UK market becomes more volatile, firms may be tempted to start doing the same, but in spotlight of the current age of social media, can they afford to?

Social media assassins will continue to put the spotlight on transparency and sustainability of supply chains. Two-thirds of millennials (aged 18 – 34) in the United States now use social media to engage companies on CSR [13]. In the UK, CSR is not just important for millennials. Almost half of all UK consumers say that brands’ support of environmental, social or political causes is becoming more important to their purchasing decisions [12].

The next two years could see sharp changes in the UK food industry not only from the Brexit fallout, but in terms of ethics and transparency. Palm oil is a good example.  As the 2020 deadline for ‘No Deforestation’ policies looms, the pressure from buyers pledging to end deforestation in their supply chain is expected to increase [16].

A supply chain management expert can help make you aware of any proposed cut-off dates for materials, products, or services that you rely on, including those of your suppliers’ sub-contractors. They can independently assess how important exclusion of non-compliant organisations is throughout your supply chain, and if adequate controls are in place to mitigate immoral practices such as modern slavery. They should also consider techniques to monitor social issues and emerging trends throughout your industry while proposing pragmatic mitigations. Corporate social responsibility is becoming increasingly important to consumers and too often private organisations don’t consider the risks that lie deep in the supply chain.

Next steps to managing risk

Whether you are responsible or accountable for procurement or contract management activities you need to recognise the benefits of strategic procurement, audits, reviews and general assurance. Commercial assurance can also provide real value and benefits in understanding risk. Investing in your procurement skills and capabilities is worth it to maximise the potential of your business.  Ensuring that your procurement strategy, approach and methodology are fit for purpose and complied with is critical – it may save you a costly legal challenge and embarrassment down the line.

Contract and relationship managers need to know about supplier strengths and weaknesses, both in performance and collaboration. Large, medium and small businesses need to take notice – the repercussions of poor procurement and risk management, especially in a volatile market, do not discriminate. As the United Kingdom embarks into the most concerning economic uncertainty since the financial crisis in 2008 – there may be no better time to re-think or assure your strategic approach to procurement and supply chain management.

 

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Article Author.

Kevin Mettam

Senior Consultant
Kevin leads and provides expertise on the delivery of Energy and Environmental related project assignments to ensure services and products... Read More From Kevin Mettam

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