Procurement & the New Normal

Price instability, market volatility, and globalization are a few of the issues procurement professionals will face for the rest of 2012 and beyond, according to a recent study. And they'll be doing it with a marginal increase in resources.

The dramatic volatility spike in supply and demand that occurred with the 2008-2009 recession will persist for the foreseeable future, the market research firm Hackett Group reports (registration required). Companies participating in the study "said they expect changes of 25 percent or greater in input prices, customer demand, and talent availability" for the next two to three years, the firm said in a press release. These businesses also expect a 1 percent increase in operating budgets and a 3 percent increase in staffing.

Therefore, the research recommends that organizations develop greater "supply agility" -- supply base agility, contract flexibility and even the agility of the procurement function itself. At the same time, they should strive to reduce supply chain risk.

Easier said than done. According to the research, procurement has lagged other departments in becoming more global. Some procurement leaders plan to nearly triple their level of globalization within the next two or three years. This effort will involve both offshoring (for routine processes) and outsourcing (for higher-value work) -- two of the strategies already embraced by manufacturing.

Some electronics industry analysts would argue that both strategies have had limited success. OEMs that began outsourcing to gain manufacturing flexibility have gradually relinquished their control over functions such as product introduction. The supply chain consulting firm Charlie Barnhart & Associates recently reported that outsourcing had unintended consequences as the electronics market became more global.

The outsourcing industry, initially on a consigned basis, began as a means by which to "buffer" these peaks and valleys in the OEM’s manufacturing requirement, but soon gained greater responsibilities as the industry expanded. OEMs continued to shrink investment in internal capabilities and outsourced more functions, more often. Eventually they began to dismantle their internal operations and launched large scale divestiture programs. These actions coupled with the impact of globalization, and an unprecedented economic downturn post Y2K, created a supply-demand imbalance in the EMS industry (favoring the OEM) and prices for manufacturing services dropped precipitously.
This advantage was embraced by OEMs who quickly came to rely upon this recurring windfall to prop up their own eroding margins. So when EMS pricing ultimately hit the bottom of the pricing curve, they had little choice but to abandon their existing supply-base and transfer their outsourcing requirements to lower-cost solutions such as China. This left many OEMs without a supportive, low-cost, local alternative for the early and late stage elements of their product life-cycle, and many simply resigned themselves to off-shoring these requirement to suppliers whose value-proposition was little more than a high-volume producer of low-cost goods in some regionally remote geography. Result? A cumbersome, expensive, and ineffectual solution that still plagues many OEMs, who continue to struggle with a cascading set of front and back-end requirements that remain inadequately or totally unfulfilled.

OEMs are beginning to rethink this strategy, particularly as it pertains to product development, Barnhart says. Bringing some functions back in-house won't be cheap, but it won't be as expensive as many companies predict.

As procurement moves toward a global model, Hackett Group recommends that companies be prepared to adapt quickly to market changes. Globalization only adds to the instability of the market. It's more critical than ever for companies to understand how each region should operate, the firm says, while gaining the advantages that come from a global process operating platform.