Supply Chain Risk

The Disaster Cycle of Crisis Procurement

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One of the aspects of ever-growing experience is the sorrow of knowledge. In times of economic turbulence, procurement could be dragged into a cycle of faulty practices that starts well before the crisis hits the company. Many of my colleagues have gone through this cycle before, and they are queuing up for the next roller coaster ride now.

The following practices have a way of exacerbating the negative effects of crisis-time procurement:

 

Top-down budgeting

Whenever a top-down budget is forced on the business, they have to trim, spread, and conceal “just-in-case” funding. As a result, some programs get under-budgeted while somewhere else, there would be buckets of “last resort” cash to patch holes ad-hoc.

No-budget sourcing

Recall the times of running sourcing projects with no budget indicated in a requisition, as the funds come from those “maverick” buckets not belonging to any particular program? End-users may not have known the subject (e.g., a bespoke technology platform or unforeseen extension of project resources) and procurement may not have wanted to bother with a cost estimate. The end result? You buy a black cat in a dark room by following a sourcing strategy (if any) that is not worth the paper it is printed on.  

Self-praised air savings

Procurement sometimes claims fluffy savings that were never reflected in the budget (as there was no dedicated budget!) Some cynical colleagues may even praise themselves for great achievements by comparing the first and last offer or similar. Gradually, the company develops a perception of procurement as an all-purpose cost-trimming instrument when, in fact, there was only an act of air trimming with no P&L effect.

Price cuts and extended payment terms “across the board”

When a crisis hits hard, execs turn to procurement for a panacea. Their traditional perception of procurement’s anti-crisis agenda is as simple as “cut prices and extend payment terms.” This means:  screw SRM, backstab your partners suffering, and survive at their cost. Unfortunately, procurement rarely objects to such an approach – they bury category strategies and approach suppliers with a sharp knife.    

Slap a consultant

As the cutthroat strategy weakens along with the extinction of suppliers, many companies decide to hire a consultant to power up. In some cases, they are simply looking for a scapegoat to blame for the underachievement of the savings target. Interestingly, consultants know the name of this game and accept it, just adding the “scapegoating” price tag to their offers.

Right shape, right size

When suppliers are barely breathing and consultants have been kicked out in disgrace, management looks at procurement savagely. It is the time of the “right shape, right size” program, where the high performers (and top payees) leave the company. Nevertheless, a beheaded body is still expected to perform with double productivity.

Rising from the ashes

After the crisis, procurement attempts to rise from the ashes with a new transformation program intended to optimize, motivate, and energize the survivors. Will that be the termination of a disaster cycle or the beginning of a new loop? Only you can decide.

 

The sooner in the cycle procurement can recognize these dynamics and make a change, the better. The further around the loop the company goes, the further procurement will fall – a loss that only lengthens the journey back to strategic relevance.

The December 2020 ISM-New York Report on Business:...
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