Six months into the Covid-19 pandemic, companies are scrambling to control costs and preserve profitability.
The dramatic impact the virus has had on industrial growth and per capita income has put pressure on the prices companies command in critical markets, forcing them to trim wherever they can. As a senior supply chain executive of a large chemicals company said: “We just want to eliminate any cost that does not deliver value”.
Which begs the question: how can they best do this? Our experience points to procurement and sourcing. When these functions are transformed optimally, we’ve seen businesses drive 4x the value, while also benefiting from supply chains that are agile, resilient and responsible.
However, many supply chain officers continue to channel time and energy into negotiating better prices from suppliers — gaining less than a third of the potential value that can be generated from procurement in the process. A disproportionate focus on negotiating costs when they could be building a diverse, climate-friendly supplier base, leaves a lot of value on the table.
When negotiations fail to deliver, and the customer is impacted by delays or compromises, corporations also risk of reputation damage. How, then, can supply chain executives avoid these potholes, while still achieving cost reductions?
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…how can procurement make the leap from being simply an efficiency function to becoming a driver of exponential value?
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The answer lies in taking Closed Loop Spend Management (CLSM) and applying a Zero-based Mindset (ZBx) to it. What ZBx does is to separate “good” costs from the “bad” costs. It minimizes bad costs, releasing funds to help “good” ones maximize growth and innovation, thereby transforming the closed loop into a growth loop. Third-party spend management becomes self-funding, agile and resilient.
Powered by robust digital platform architecture that connects all nodes and creates an unencumbered view of the procurement universe, this approach co-creates, pilots and scales initiatives across three axes of value, yield and agility.
Unlocking new sources of value
Combining the power of analytics, AI and frontline technologies like blockchain, Accenture’s CLSM approach unlocks new sources of resilient and responsible value by allowing supply chain leaders to:
- Build a dynamic database of changing customer needs and priorities
- Diversify their supplier base, increasing their resistance to supply side shocks resulting from economic, health or political disruptions
- Unlock best-practices and ways to become more responsible to suppliers, ecosystems and the planet
One global oil and gas major, for instance, managed to halve its inspection services costs (thereby taking out “bad/unnecessary costs” out of the system) by identifying technologies and suppliers that could drive improvements in operational and environmental safety, while maximizing recovery rates. Using AI and pattern detection solutions tailored to the task, it scanned terabytes of data, searching for new clusters of previously unknown technologies and suppliers. This led to the identification of 13 new technologies and 155 new suppliers for subsea and topside inspection in the global marketplace, and a more diverse supplier base. Beyond halving the costs of inspection services for the company, the use of AI reduced the effort of insight generation by 80 per cent, even as it analyzed 20 times more relevant data.
Driving best-in-class yields
The CLSM approach consistently delivers better yields by enabling:
- Category and sourcing excellence from more accurate and holistic contextual intelligence via machine learning
- Agile management of categories with very high-spend and variability of demand
- Outcome-based contracts that give suppliers skin in the game, and value engineering to drive fit-for-purpose specifications
- Combining the power of bid analytics with cost modelling to evaluate complex tenders with multiple bidders
In South East Asia, for example, we have been working with a leading consumer products company to reconfigure its supply chain network and intelligently source the components for a new e-commerce channel. A comprehensive analysis of customer transaction data has enabled its suppliers to become more responsive to demand fluctuations, making its overall supply chain agile and resilient to shocks. Insights on the performance of these suppliers, meanwhile, has made it possible for the company to sign outcome-based contracts and move towards a variable cost structure—creating opportunities for companies to reinvest cost-savings into growth opportunities.
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Building procurement agility
Finally, the CLSM approach also allows supply chain leaders inject agility into the procurement processes in various ways, including by:
- Rapidly targeting value and prioritizing quick wins to generate immediate cash and improve profitability
- Executing a non-linear approach in Plan, Source, Buy, and Consume with partners in each target area
- Reducing spend categories through enhanced demand visibility, while leveraging technology to improve operational efficiency and optimize working capital across the network.
Data-driven analysis at the procurement office of a leading telecommunications company, for example, showed that half the transactions their senior procurement executives were involved in were of no or low value. Armed with this insight, we worked with the company to build a series of thresholds that would ensure senior executives were only pulled in on strategic sourcing and transactions that created business-value, freeing them from chasing these “line-items”. Meanwhile, solutions that optimized both human and machines capabilities were built into the company’s operating architecture, making for a more agile procurement organization. The procurement function was reorganized into ‘Support Hubs’ and ‘Centers of Excellence’ to better meet specific customer requirements and multi speed procurement sourcing and buying based on specific user needs & spend complexity, respectively. The CSLM approach delivered a 60 percent reduction in tactical workload, and enabled procurement to focus on value creation.
Covid-19 has made glaringly evident what we’ve known for a while now – that traditional approaches don’t go far enough. Price negotiations and piecemeal cost cutting can only deliver so much. Accenture’s CLSM approach, by contrast brings to bear “good” costs, eliminates “bad ones” and creates resources to finance productivity, growth and innovation.
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