Why 2018 will be a year for procurement organizations to watch out
In 2018, procurement organizations will increasingly find themselves in a sandwich position between dealing with the disruptive changes driven by digitalization and the attempt to tackle the new normal: a business environment characterized by volatility, uncertainty, complexity and ambiguity (VUCA).
In 2018, all major industries are facing the question of how to deal with increasing feedstock and raw material prices to avoid further margin erosions. As customers request more specific and individual products, portfolios of procured goods are continuously getting fragmented and heterogeneous. In consequence, leveraging market potential is becoming an extremely volatile business.
Feedstock markets – what will happen in 2018?
A present example is the drop in oil prices by more than 70% within less than 18 months followed by an increase of more than 100% in the following 18 months. While the oil price is not only an indicator for the general macro-economic state of the world’s economy, it also affects the production strategy and profitability of petrochemical and chemical manufacturers. Within the last decade price mechanisms have changed dramatically, and the once limited product has been aggressively pushed to the market. The US became a net exporter of oil and today local shale oil production is considered to be a major ambiguity for price development in the US. Oil price (Brent) forecasts for 2018 are between a range of $55 (BNP Paribas SA), $57 (EIA), and $60/bbl (JPMorgan Chase & Co), but what if shale oil production does not develop as assumed?
The current operating model of procurement organizations is challenged by the accelerating digital transformation not only of its own organization but also of suppliers. To keep pace with fast developments, most organizations have identified their needs and requirements and started major initiatives. However, resources are limited and the challenge for a business-related function such as procurement is to stay on track on the digital route while still monitoring market and price developments to achieve best conditions for procured goods.
Currently, for technologies like blockchain and the related smart contracts, big data capabilities and artificial intelligence, real and sustainable business cases are evolving. Hype topics of recent years are becoming reality. Now is the time for procurement to seize this opportunity and further shape business cases not only with suppliers but also within its own organization.
Digital transformation is not about transferring processes to new systems, but about radically rethinking existing structures. Therefore, a break with traditional, organizational procurement structures will be needed to remain in the game.
When suppliers become competitors
It is expected that further cross-industry mergers or acquisitions will happen. In all major markets and regions, the trend for consolidation or specialization will remain. Future suppliers will be either large, fully integrated conglomerates or small, flexible niche players with very specific products. Longstanding suppliers could suddenly disappear and therefore the leverage of existing or new suppliers will significantly increase. In some cases, suppliers in commodity markets with high levels of competition will try to add value by forward integration or by reshaping their value proposition. This development might turn existing suppliers into competitors. Is supplier co-innovation the right answer? Especially for procurement, supplier collaboration will be a crucial success factor to ensure competitiveness for the entire business.
And what’s with all our standard procurement tasks?
Despite all the hype topics, the classic procurement activities will of course remain core. We believe that especially in a world and in times of digital transformation the crucial success factor is to do your homework: A well-thought-out procurement strategy with a comprehensive category management, market and price transparency, supplier and risk management, as well as a smart spend management are a prerequisite for procurement organizations. This work can be supported by digitalization and innovative technologies, but still needs to be driven by the organization and people. The threat we perceive is that overloading procurement organizations with multiple projects and initiatives, resources are not allocated adequately.
So, what to do in 2018?
There are common challenges for all procurement organizations in 2018, plus very specific ones we
see in our core industries of chemicals, life sciences, industrial manufacturing and consumer goods. We have prepared a short summary of these challenges and possible actions. If you wish to take a look at it, just click here. 2018 will definitely be an intensive year for procurement. Are you ready?
About the authors
Ferhat Eryurt is Partner for Sourcing & Network Supply at CAMELOT Management Consultants. He is an internationally recognized expert in procurement and strategy topics, leveraging more than 10 years of practical experience in consulting as well as in the industry. (Contact: firstname.lastname@example.org)
Wolf Goehler is working for CAMELOT Management Consultants as a Managing Consultant for Sourcing & Network Supply. He has over 10 years of professional experience in several logistics and procurement functions as a line and project manager as well as consultant. He has major industry experience in the Chemicals and Logistics sector with a proven global project footprint. (Contact: email@example.com)