For businesses of every size and type, both 2020 and early 2021 have seen a near-perfect storm of supply chain woes. Many of them were related to the pandemic, the bull-whip effect from which has spread across the global economy in hard-to-predict ways both now and in the future too. We have seen this in many forms from delivery delays, staff shortages, spiking prices, shipping bottlenecks, trade tensions, shifting customer demand, business closures, factory furloughs, cancellations, and material shortages, just for starters. There were other causes too, including freak weather patterns, an extended blockage of the Suez Canal, Brexit and cyber hacks, all of which conspired to disrupt in an unprecedented way business patterns.
Their impacts, both singularly and collectively, are still being felt and have affected everything from microchips to chicken wings, and plastics to pallets. In some instances, shortages already noticeable before Covid-19, became amplified, turning smaller supply problems into near-crises. In others, the impacts materialized more abruptly, creating unexpected shortages along with spiraling prices. But in every case, normal business operations became impossible and procurement professionals were challenged to find ways of mitigating the fast-shifting arrangements for essential supplies.
Some of the business orthodoxies in place prior to 2020 only aggravated the problems. For example, the just-in-time approach to deliveries popularized during the 1980s meant that when sudden supply disruptions materialized, companies with lean inventories found themselves scrambling for replacements or even shutting down. Likewise, focusing solely on one preferred vendor or one convenient supply location exposes the buyer to greater risk than having a diversified base of suppliers. As in any chain, the weakest link determines the overall resilience of the entire supply chain. What we’ve seen is that those companies with more robust and sophisticated supply chains in place were better able to quickly pivot and find workarounds for broken links. Agility was the key, and diversity enables agility.
In the case of Rolls-Royce, which designs, builds, and distributes power systems for aviation and other industries worldwide, having a strong supply chain is not merely a good business strategy; it is an essential one. Its procurement group includes nearly a thousand people, divided among the company’s three divisions along with a central function under GBS: Civil Aerospace, Defense Aerospace, and Power Systems. Beyond seeking more efficient spending, its mission involves re-imagining the company’s whole approach to procurement.
That’s because procurement, over the century-long history of Rolls-Royce, has evolved from a reactive purchasing role – responding to requests coming in from line operators which are focused on logistics and cost containment – to a far more strategic corporate function. Naturally, managing costs still matters. But over time, procurement has expanded to include other business priorities such as risk management, resilience, corporate citizenship, ESG, innovation and much more. In leading organizations, procurement is also a creator of internal stakeholder collaboration, a forward scout identifying new sourcing opportunities, and a vehicle for new business growth and resilience.
Procurement’s expanded corporate role was largely made possible by new technologies with capabilities powerful enough to support its transition. Among the most important were tools capable of gathering massive volumes of information, from multiple sources, in real time, for rapid analysis and decision-making. Cloud-based platforms have been fundamental to enabling transparency and bringing internal and external customers into alignment. That same technology has also gone a long way to eliminate the manual processes which characterized business purchasing transactions in the past, while creating a foundation for continuous communication between departments, vendors, and lower-tier suppliers going forward.
Rolls-Royce presents a great example. The company secured an agreement with my own company, Ivalua, for software to manage its direct spending on items like specialty composites, microchips, and sub-assemblies – the things that go into the products it sells. Using simplified administrative procedures and standardizing the definition of terms, that technology forms the platform upon which the company’s digital procurement capability is now being built. Among other ways, it enables Rolls Royce to analyze contracts, supplier performance and risk data in real time. For example, the ability to have accurate and reliable pricing that is up to date with payment terms, all of which can be accessed during a phone conversation eliminates the age old issue of literally scrambling for files, contracts and a host of other documents and speak with confidence.
Further, the advantage of being able to see at a glance the commercial offers from multiple sources both historically and scenario model new offers to ensure optimum value while ensuring supply chain resilience when de-risking single source arrangements really matters to all parties. Starting in late 2019, the company began deploying the software to digitize its entire contract base, with the first phase now complete and the second planned for Q3. Once complete, it will have a global reach, serving approximately 500 users in seven countries.
The transition to a fully digital procurement system and the corresponding move away from manual and analog processes, is helping position Rolls-Royce procurement transition from being viewed as procurement experts to business leaders with procurement expertise. At the same time, though, just as weather issues will always be a challenge to punctual air travel for even the best planes, unexpected changes at different tiers in the supply chain will remain a destabilizing factor for the manufacturing world. But with appropriately high levels of visibility, diversity, and agility, the turbulence encountered in that journey will become more manageable.