Strategic procurement can help combat market uncertainty and control costs

ARTICLE | July 10, 2023

Authored by RSM US LLP

Ongoing challenges in middle market supply chains have highlighted the downside to years of global sourcing and single sourcing.

Many manufacturers and distributors find themselves being held hostage to a supply base that behaves much differently than it did just a few years ago. Issues include unpredictable availability, continued cost increases and highly erratic lead times. In addition, inventory levels have drastically increased in the last several months as a combination of decisions around increasing buffer stock have combined with compressed demand.

Improving procurement capabilities should therefore be front and center. Organizations should de-risk their supply chains with improved supplier optionality, optimized inventory levels and perhaps most importantly, stronger strategic supplier relationships that enable flexibility and cost control.

Diversifying suppliers

Going forward, supplier optionality is one of the primary means of improving resilience, reducing risk and improving value. While not always possible, developing multiple suppliers for the same item spreads out risk, creates a competitive environment, often develops a second set of next-level suppliers and allows for smoother capacity adjustments. We see many companies single source almost everything, leaving their supply chain inflexible and subject to spikes in demand and supply. 

Excess inventory

Another very common action companies took in response to recent erratic supply is increasing inventory. A recent Forbes study showed that global manufacturing inventory grew by 30 days from 2004 to 2022. Even with the latest ERP systems in place, CEOs clearly sought to reduce risk by putting inventory on the floor as a form of safety stock. Now facing higher inflation and shrinking demand, companies are unable to react effectively as warehouses are full of the wrong finished goods.

Frustrated chief financial officers are reacting by elongating payables to improve the cash-to-cash cycle, often sending unilateral demand letters to suppliers instead of leveraging payment terms as a negotiating point in the larger value equation of total delivered cost. The result is often damaged relationships and a weakened ability to execute strategic sourcing, thereby creating an even more inflexible and higher-cost supply chain.

An effective procurement approach

Improving supply chain resilience through supplier optionality, lower inventory and better value can all be addressed with a proven approach to strategic sourcing and better supply chain planning. RSM uses a unique five-step strategic procurement process, containing several critical components that enable our clients to perform more effectively beginning with a complete spend analysis and procurement maturity assessment. 

RSM’s unique five-step strategic procurement process

Performed properly and in the right sequence, the five steps and their components consistently deliver better value (often from incumbent suppliers) and improve supplier optionality. Combining the five-step strategic procurement process with a sales and operations planning process focused on scenario planning and predictive analytics results in a more flexible, higher value and resilient supply chain capable of flexing inventory in response to changes in demand and supply. 

Learn more about how our supply chain services team can improve your company’s value and supply chain resilience.