During the first months of COVID-19, we were able to observe a significant drop in the level of collaboration among procurement organizations. Most networks weren’t sufficiently prepared for the pandemic, and supply chains across the globe struggled to obtain critical supplies.

In light of these early breakdowns, procurement organization leaders are searching for ways to become more resilient to drive and improve their business performance going forward.

Procurement today must reflect the new normal that is reshaping all aspects of its operating model — its organization, governance, processes, capabilities and technology. So, what should procurement leaders consider to create more proactive, resilient and cost-effective organizations?

1) Enhance supplier collaboration and improve the procurement operating model

In times of global trade slowdown and unexpected supply disruptions, the key role of chief procurement officers (CPOs) is to ensure the supply of critical materials by closely collaborating with suppliers. Supplier networks, in particular, need to be reassessed, including sub-tier relationships.

Short-term measures (0 to 3 months):

  • Create transparency within tier 1 and tier 2 supplier networks and proactively manage these relationships to accelerate advanced decisions, capture early warnings and generate quick wins
  • Assess total supplier reliability (TSR) and quantify the supplier risks related to financial, executional, regulatory, sustainable and business-continuity aspects, leveraging internal and external data sources
  • As a minimum, develop business contingency plans for essential materials based on a material criticality assessment and exchange-to-exchange (E2E) supply network analysis

Mid-term to long-term measures (3 to 18 months):

  • Drive tight relationship management and collaboration with your suppliers, sharing forecasts through joined efficiency programsaimed at cost reduction and increased effectiveness
  • Revise the procurement operating model, including organizational setup, governance, processes and technology, and reevaluate roles and responsibilities (at the global, regional and local levels) to identify near-shoring, offshoring and outsourcing opportunities
  • Define a future procurement capability framework based on the revised procurement operating model, identify workforce gaps in required capabilities and design corresponding development plans and trainings

2) Drive cost optimization to improve bottom line and cash-flow balance

The COVID-19 outbreak significantly impacted the gross margin, the bottom line and cash-flow balances. Procurement organizations have the potential to counteract this trend by improving general, selling and administrative costs. To do so, leaders will need to look closely into every category to identify cost-reduction opportunities.

Short-term measures (0 to 3 months):

  • Conduct a spend analysis, ideally boosted by AI and machine learning, to identify interdependencies and a tactical assessment to identify savings potential and key sourcing levers per category. Define strategic sourcing initiatives, such as consulting services and travel-related insurance.
  • In the context of corporate cash-flow management, review and adjust the supplier payment terms strategy to ensure cash-flow improvements

Mid-term to long-term measures (3 to 18 months):

  • Review future workforce strategy and flexible working concepts, including the impact on office space requirements and related services to further drive down costs
  • Reassess your hardware strategy and future volumes required for IT hardware and equipment to account for the expected increase of home-office work
  • Review contract governance and the benefit realization process for potential contract leakages, which are estimated to be around 5% to 10% of the annual contract. Consider having contract leakage managed by a third party, and leverage leading-class technologies like cost modeling or media bidding.

3) Drive procurement efficiency and transparency through digitalization and innovation

Most CPOs would agree that COVID-19 has been a historical milestone that sped up the process of procurement digitalization, with positive results for flexible and remote working. Procurement organizations are continuing to invest in digital transformation initiatives, such as process automation, chat bots, connectivity platforms and underlying analytics. Our experience has shown that up to 70% of procurement activities can be digitized, leading to large cost-optimization potentials.

Short-term measures (0 to 3 months):

  • Move from thinking about digitalization to becoming digital by developing a 3- to 5-year digital procurement road map. Ensure that your road map is tailored to your needs and opportunities. A benefit case based on driving efficiencies in the organization and creating mid-term to long-term benefits is essential.

Mid-term to long-term measures (3 to 18 months):

  • Implement a digital procurement road map, leveraging emerging technologies to:
    • Reduce costs through automation (robotic process automation, machine learning and cognitive automation)
    • Improve interaction with suppliers and create a one-stop shop for suppliers through supplier portals
    • Increase transparency and allow for informed decision-making for buyers via buyer portals
    • Gather, visualize and leverage data to drive informed decision-making using analytic portals and customized dashboards
  • Digitally integrate supplier operational data to improve E2E visibility with supplier collaboration platforms and enable customers to access data to become more customer-centric
  • Enable cross-silo teams to participate in agile initiatives to build up an analytical insight ecosystem supported by big data, cloud-based platforms and trading networks

By developing stronger and more transparent supplier relationships, driving cost optimization with more flexibility and quicker reactivity, and enacting digital transformations during COVID-19, CPOs have the opportunity to demonstrate the significant value they can create for their business. Now is the opportunity for procurement organizations to shine.

The views reflected in this article are those of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

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