Buy globally, think globally: How procurement officers can apply foresight to outsmart competitors

Procurement departments have often been slow to recognize and respond to situations taking place on the ground in local sourcing markets that have the potential to significantly disrupt their supply chains. By answering four simple questions, procurement officers can stave off difficulties and get a jump on competitors that are still paying less attention.

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Buy globally, think globally How procurement officers can apply foresight to outsmart competitors

Contacts

About the authors

Cleveland Harry Hawkes Partner +1-216-696-1574 harry.hawkes @strategyand.pwc.com

New York Richard Kauffeld Partner +1-212-551-6582 richard.kauffeld @strategyand.pwc.com Martha D. Turner Partner +1-212-551-6731 martha.turner @strategyand.pwc.com

Vienna Harald Dutzler Partner +43-1-518-22-904 harald.dutzler @strategyand.pwc.com

Harald Dutzler is a partner with Strategy& in Vienna. He specializes in transformation and efficiency improvement programs for the consumer goods and retail industries. Laura Harnett was formerly a Strategy& senior associate.

Editor’s Note: This report has been adapted from “Buy Globally, Think Locally,” published in Sourcing Reloaded: Targeting Procurement’s New Strategic Agenda (Strategy&, 2008).

This report was originally published by Booz & Company in 2011.

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Executive summary

Procurement departments have often been slow to recognize and respond to situations taking place on the ground in local sourcing markets that have the potential to significantly disrupt their supply chains. These may include trade disputes, commodity price movements, currency fluctuations, tax policy changes, political upheaval, or rising labor costs, among many others. By applying more foresight, procurement officers can stave off difficulties and get a jump on competitors that are still paying less attention. Answering four simple questions can make it relatively easy to take advantage of (or at least not be harmed by) global conditions: (1) Which categories within our procurement expenditures are strategic enough to warrant close attention? (2) What are the economic, regulatory, and political cost factors behind these key categories? (3) How would changes in those factors affect the overall performance of our current sourcing arrangements? (4) How can our team best monitor these potential changes?

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Welcome to the 21st century

It’s not unusual for procurement teams to react sluggishly to macroeconomic changes. A case in point: Purchasing departments of many European apparel retailers were apparently caught off guard in 2005 by the “bra wars,” during which Chinese-made textiles piled up in E.U. warehouses, barred from sale as a trade dispute simmered. Claiming to be innocent victims of an intergovernmental squabble, retailers moaned that millions of euros in lost sales were at stake because of the unexpected turn of events. But in fact, the retailers should have been more prepared; the saber rattling over importing inexpensive Chinese apparel into the E.U. had been going on for some time. The problem is that many procurement officers are running their long, complex 21st-century supply chains with a parochial 20th-century outlook. Often, they don’t stop to think about how an event such as a war or a change in tax policy in a distant part of the world can have an impact on the availability of a commodity or service their company needs. In truth, these blind spots are good news for any procurement officer who is willing to do a bit of homework. An understanding of the economic and geopolitical dynamics of the markets in which a company participates can lead to many opportunities overlooked by its competitors and can create a competitive edge where seemingly none was available. For some commodities, a procurement manager can profit from knowledge of regular cyclical price swings by locking in prices at the bottom of a cycle. For others, an understanding of the market can help procurement officers see when a permanent shift has occurred. The price of sugar, for example, is set not merely by the demand for sugar as a food ingredient, but also by the growing need for sugar as a raw material for ethanol, thanks largely to Brazil’s ambitious ethanol fuel program. As a result, whereas sugar once hewed to its own seasonal supply-and-demand cycles, it now also tracks the price of oil—a fact that a company could use to gain an advantage over competitors who monitor only seasonal cycles.
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Currency wars and opportunities In addition to overall commodity price movements, currency fluctuations can provide a source of savings — and of danger as well. Currency hedging, commodities derivatives, and minimizing foreign exchange exposure should all be employed to protect against wide swings. Is the weak U.S. dollar going to fall even more? If you believe so, perhaps it makes sense to lock in a dollar price on this year’s inventory now. Japanese yen seem too uncertain? A company could hedge now, and prevent an unexpectedly high price tag later on, or make sure a contract is denominated in the company’s currency. Indeed, the continuing inability of the U.S., China, Europe, and Japan t o reach consensus on currency valuations raises the chances of ongoing currency price imbalances and only punctuates the need for companies to manage foreign exchange volatility aggressively and intelligently by, for example, adding exchange rate fluctuations to cost considerations when purchasing materials and other goods. Divide and conquer Sometimes a currency-related opportunity may exist even when one’s direct purchases are made in a single currency. For example, if a company pays in euros but one of the key commodities used by an upstream supplier is priced in U.S. dollars, it’s possible to disaggregate the dollar-denominated costs and negotiate a discount if the dollar has declined against the euro. The same divide-and-conquer gambit can work well for uncovering other kinds of cost drivers. By separating the value of underlying commodities in a product, one can more easily see what the true cost should be. Vendors are all too quick to demand higher prices when some of their cost factors go up, but are understandably less than eager to point out when those same prices go down again. A knowledgeable procurement manager with access to a bit of price data might call the vendor and say, “Hang on, why am I still paying the same as I did last month, now that sugar is down 3 cents per pound?” As well as monitoring daily, weekly, or monthly fluctuations in prices, it’s also crucial to understand trends in macroeconomic factors over the long haul. For example, a company that spots rising labor costs in a low-cost country where it is outsourcing, such as China, could gain enough time to scout out partners in less costly locations before its existing agreement becomes uncompetitive. A little global foresight also allows a company to create a significant competitive advantage by anticipating a price spike or a commodity
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By separating the value of underlying commodities in a product, one can more easily see what the true cost should be.

shortage better than its rivals can. For example, in 2005, some businesses were surprised by China’s cardboard shortage, realizing the problem only when orders started to arrive in weak, bulky boxes made of wheat or rice straw. Sourcing managers who were aware that China faced a serious shortage of harvestable trees, and that non-wood fibers accounted for nearly 85 percent of the pulp China produced, had already planned for suitable alternative packaging — or sought to specify the grade of shipping material in contracts. But those who failed to foresee the problem found themselves coping with damaged cargo. Benefiting from global conditions Anticipating all the possible permutations that can affect sourcing appears to require a highly sophisticated level of foresight, but answering four simple questions can make it relatively easy to take advantage of (or at least not be harmed by) global conditions: 1. Which categories within our procurement expenditures are strategic enough to warrant close attention? 2. What are the economic, regulatory, and political cost factors behind these key categories? 3. How would changes in those factors affect the overall performance of our current sourcing arrangements? 4. How can our team best monitor these potential changes? The first question requires little more than diligent self-analysis; the second and third can be addressed by sending out an all-points bulletin throughout the organization for, say, legal, finance, and tax experts to flag relevant changes in economic and geopolitical conditions pertaining to the purchases that the company has determined are strategic. In addition, procurement staffers can be directed to read articles in newspapers and trade journals involving these items or, in the case of a commodity, to closely monitor the sector via websites that cover it. Also, blogs are becoming increasingly valuable sources of industry information. And even casual conversations with suppliers can be useful. If a vendor is moving its manufacturing from country X to country Y, a simple “why?” may uncover deeper changes in the market. As for the fourth question, once the most important cost factors are identified, they can often be tracked relatively easily by creating a simple online dashboard of commodity prices or even by subscribing to online news alert services such as those offered by Google. For major commodities, price quotes only a few minutes old are often available
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online at no cost, and most industries have newsletters and other publications that track price trends. And this kind of data is not confined to raw materials. For almost any product manufactured in large quantities, even such high-tech goods as flat-screen displays and computer memory chips, it is almost certain that someone somewhere monitors its price. Of course, it’s one thing to subscribe to a report or install a widget on a procurement manager’s screen. It’s another to make sure the manager and the department make good use of the information. One way to embed awareness of economic factors into the procurement team’s day-to-day operations is to set key performance indicators for expenditure categories that incorporate appropriate macroeconomic factors. For example, if a particular metal is 30 percent of a part’s cost and the entire product is priced in U.S. dollars, assessing the procurement manager’s contract prices against currency fluctuations will provide a good litmus test of the manager’s performance. It might sound great that a buyer was able to avoid a price increase on a part over the past year, but if the dollar is down 5 percent, that accomplishment begins to look less impressive. In most cases, global sourcing analysis primarily identifies opportunities for cost savings by making pricing more transparent, trends more obvious, and negotiations less prone to deception. But smart procurement can also create value and increase profits when it is used to develop consumer insight and anticipate changing buying patterns. For example, Whole Foods, one of the few profitable grocery chains in the U.S., has employed a deep analysis of consumer purchasing trends to fill its stores with organic foods, tapping into a growing and well-heeled customer base that is willing to pay more for items without additives and other unnatural ingredients. Those and similar eco-friendly preferences seem likely to proliferate in the future, so why wouldn’t a savvy food buyer be proactive and lead his company in capitalizing on the geopolitical hot topic of climate change by sourcing “carbon-neutral” food? Indeed, for the globally savvy CPO, the opportunities may be as unlimited as the challenges.

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This report was originally published by Booz & Company in 2011.

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