The UK posted quarterly growth of just 0.1% in Q1. Germany looks like it is heading into recession with industrial production falling in March. So, with such glacial growth in the UK and potential decline in Germany, the macroeconomic outlook is far from rosy. Of course, predicting markets is hard, but with central banks increasing interest rates in an attempt to get inflation under control, we can be sure that whilst some price volatility has dropped, strong and stable it is not!
So, what does this all mean for procurement? Procurement leaders should be conscious of the short-term environment, but it’s also their role to look at what might be a further down the road and think strategically about how their work is aligning with long-term business priorities. Our view is that there are some very clear short, medium and long-term areas where focus should be given.
Let’s start with the short-term. Volatility in supply chains has, for now, has reduced from the extremes of post pandemic boom and Russian gas squeezes. Procurement leaders in the short term must focus on cost optimisation. Suppliers account for 70% of FTSE companies’ average spend and ensuring this spend is managed effectively and efficiently is a business imperative.
Taking a more strategic and focused approach to spend management can help protect business margins at a time when the economic direction of travel is unclear. It also sets the company up for long-term success – research from Bain & Company shows businesses that bought better in downturns recovered faster than their peers and enjoyed better long-term health.
The theme of economic uncertainty brings us to our medium-term areas of focus – risk management. Do you have a clear picture of what risks, whether financial, operational or reputational that could emerge for your business in the next 18 months, and is an appropriate plan in place to manage them?
I’ll give one concrete example of a medium-term risk for most businesses – energy costs. Europe enjoyed an unusually mild winter, which saw spot prices tumble as supply continued to out perform expectations. We head into this summer with European gas storage 60% full at a time when for an average summer storage is normally below 20% full. So future costs have fallen sharply, albeit from record highs. But many buyers have long memories associated with record highs in September last year, could we return to a volatile market if demand picks up aggressively in winter 23/24?
Once we have gas storage full, there is no guarantee that we will have enough gas to meet demand in an extreme cold winter which could lead to a spike in energy prices. If that happens, what is your business plan? We saw so many businesses caught out following Russia’s invasion of Ukraine because they hadn’t planned for the unexpected – and it’s incumbent on procurement leaders not to let that happen again.
Looking at more long-term global efforts to reach net zero emissions and for businesses to operate in a more sustainable and ethical manner continue to be a beacon that companies should move towards. There are two very different aspects to that relating to procurement.
The first is the work taking place to map and reduce Scope 3 emissions. This is an extremely complex task, and many businesses are learning as they go. This can be a steep curve and one where ambitions and reality collide – as we saw recently with Crocs pushing back their Net Zero target to 2040, partially due to the fact that when they made their initial 2030 commitment, they had not completed a comprehensive baseline of its greenhouse gas emissions.
The importance of this work is why Proxima created, in collaboration with the Scope 3 Peer Group, The Scope 3 Maturity Benchmark. This brings together some of the world’s most well-known businesses to benchmark progress and then build credible and realistic action plans to move faster and with more certainty toward net zero. This process of understanding where your business stands and implementing ambitious yet realistic plans is exactly where the long-term focus of procurement leaders should be.
The second long-term aspect is changing legislative requirements across European countries, which can be broadly grouped as looking to advance the broader social responsibility agenda. Das Lieferkettensorgfaltspflichtengesetz (or the German Supply Chain Due Diligence Act as it’s known in English) is one example. It came into force on 1 January 2023, and already Amazon, Ikea, and Tom Tailor have had complaints filed against them for non-compliance.
There are a number of similar pieces of legislation either already in effect or coming down the track. Ensuring compliance with these laws is going to be a complex process and now is the time for everyone in procurement to be ensuring they are getting their businesses ahead of the game.
The day-to-day volatility we have seen over the last three years may be disappearing from procurement. That gives us an opportunity to focus on how procurement can create long-term advantage for companies – by both addressing the short-term problems that will clear the path for long-term success and by getting ahead of long-term challenges that will present issues in the years and decades to come.