It seems to be accepted as a given that costs are rising across categories and verticals (or niche) markets and that this trend is set and likely continue for some time. There are a number of reasons for these increased costs, but the most significant are those, which, create fragility and could individually or collectively destroy an organisation’s supply management structures and networks of even the largest global corporations – no one is too big to fail. So what are these issues?
Well, inflation is back with a vengeance and commodity costs are rising around the world. According to the Economist Intelligence Unit global oil demand in 2013 may accelerate at almost double 2012’s pace amid growth in China and the U.S.
The Hightower Report predicts that few commodities have a more uncertain outlook than corn, meaning producers should account for the potential for high volatility. Cattle futures dropped sharply in early 2013, but shrinking beef supplies set the stage for price upside later this year and the severe U.S. drought in 2012 has persisted into 2013, sharpening grain market focus on the spring planting outlook. Credit clouds still hanging over global markets and the continued unwinding of the credit cycle will be the overriding force which shapes this year’s investment climate.
That said, the Economist Intelligence Unit reported that the global economy began in 2013 with stronger fundamentals, with the euro crisis eased and China poised to accelerate. The second major issue is that market growth has stagnated and as a result, so has job growth. Stagnated growth in markets will seriously limit businesses’ ability to increase the breadth of its strategic sourcing activities and get more spend under management, which is critical to controlling costs.
This deterioration in market activity should be seen as warning sign for CFO’s and CPOs to get spend management under control. Yet lack of adequate resource in the shape of commercially savvy talent and investment in and the application of new technology has held many organisations back in making the headway they need to grow their sourcing efficiency. In addition, slow market growth means that volume is not going to increase, and as a consequence a CPOs ability to negotiate (additional) volume-based savings will be restricted.
Finally, the perennial problem of risk identification and mitigation has worsened. A considerable amount of research on risk and the changing nature of risk in complexity has identified that the effective identification of risk and stratagem to mitigate and or reduce it are hard to pin down.
In a Delphi Study conducted by Professor Brian Squire from Bath School of Management, with procurement managers or directors from two countries (UK and China) provides useful insights into differing perspectives of risk in the supply chain.
The study revealed 300 individual risk factors from various sources and the urgent need for comprehensive risk management in organisations to address such a diversity of supply chain risk. The majority of risk lies upstream with over 60% of risks in the UK sample located upstream within the supply base.
The study also showed that organisations are not sufficiently prepared to manage supply chain risk with 50% of UK organisations confirming that they had no formal methods for identifying supply chain risks and this rose to 87% in China. Interestingly, mitigation was seen to be aligned with risk impact but not with risk probability. In the UK, organisations are closely aligning levels of mitigation with the impacts of disruptions but are ignoring the inherent variability in risk probability.
The five most significant threats to the resilience of supply chains in the UK are:
• Escalating costs of fuel and energy
• Lack of internal management maturity
• Conflicts in supply chain caused by current pressures on cost cutting and survival
• Financial instability of suppliers leading to supplier failure
• Exchange rate fluctuation
Here we have only examined three of the reasons why costs are increasingly difficult to manage across categories and verticals, but that said, this is food for thought for most CPOs with regard to how they tackle this problem.