Secondary Sourcing: Risks vs. Rewards

Editor’s Note: Gregor Stühler is CEO and cofounder of scoutbee

Supplier Management has never been a more relevant topic for business - while it's impossible to predict the future, we can get better and faster at adapting to it

If 2020 has made anything clear, it's that nothing is completely insulated from a global event, natural or man-made, throwing a wrench into the normal flow of life. For those in the procurement industry, it prompts the question — what's the backup plan? What do you do as a business when the entire world is suddenly concerned with supply chains and yours is now missing a link? There are massive inefficiencies in sourcing backup suppliers that underpin the problems the supply chain faces today, largely due to an industry-wide reluctance to adopt new digital processes.

However, it is the companies that have digitized that have proven to be the quickest to react and pivot with data and automation. With the right insights driven by vast amounts of data all working together to create a clear picture, procurement teams can manage their categories with far greater expertise and agility, earning a seat at the table as a value-creation center. The Economist agrees; in 2019 the Intelligence Unit encouraged teams to change the dynamics of trade insecurity by identifying alternate suppliers.

Traditional Procurement Is No Longer Enough

Purchasing is a long, often manual process that hasn't changed much in over a decade. As the rest of our lives accelerate with technology—in 2005 we didn't even have the iPhone—procurement as a whole has not. Still today, sourcing suppliers consists of internet searches, translating hundreds of foreign or poorly designed websites, and costly travel to production centers in far parts of the world to confirm basic information.

On average, a procurement manager for a company not working with up-leveled techniques can spend six months to a year in the scout-to-source phase. Consumers can now have groceries automatically delivered in temperature controlled boxes to their doorstep through a few clicks on an app, so why has much of the procurement industry only just taken first steps to automate the vast amounts of data needed to find a single supplier?

The reasons for much of procurement's glacial pace makes sense when viewed with a 2005 or earlier lens: cultural and language barriers take time to break down and understand. Normalizing data and confirming information so that every supplier is vetted across the same set of standards takes time. Each supplier has its own onboarding system and company-specific policies that have been in place since the company's founding.

Fast forward to 2020, and none of this makes sense within the pace of today's lightspeed business transactions. At best, old guard supplier identification tactics are a simplistic exercise for procurement teams. It is a struggle for these teams to meet the needs of multiple stakeholders within an organization, each on their own quest for innovation or cost-cutting. At worst, traditional procurement practices stymie the ability for these organizations to react dynamically to the influences shaping the global supply chain, of which we are not lacking.

Shifting the Procurement Mindset

If technology is such an obvious asset to procurement, why hasn't it overtaken the industry yet? In a word: risk. Procurement teams are typically risk averse; they can often waver between ‘if it isn't broken, don't fix it' and concern at signing off on something they cannot guarantee will go off without a hitch.

Even though traditional procurement adds its own level of chance to sourcing secondary suppliers, as Kelly Barner, Managing Director of Buyers Meeting Point puts it, “The hardest thing about supporting innovation with alternative suppliers is the risk. There is a higher level of risk for the company because they are (presumably) trying to do something for the very first time, and trying to do it with an unknown supplier to boot.”

“If this additional risk burden causes procurement to forgo opportunities to innovate, it is a loss for everyone involved. If we can't take healthy qualified risks, and understand that sometimes we will fail, then we are doomed to deliver results that are confined to the ‘same old, same old' rather than new, disruptive solutions.”

It may seem that procurement teams are slow to adopt new technologies, but the underlying truth is that they need to have more certainty in order to feel comfortable wading into the new waters of digitized procurement.

Proactive Procurement with AI and Big Data

Traditional methods mean that procurement teams cannot standardize the process of identifying secondary suppliers in the event that their primary supplier cannot fulfill their obligations. Despite the proof that events like this happen on a regular basis (a 2011 tsunami that threatened Japanese manufacturing, a 2018 supplier plant factory fires that took out Ford's F-150 production line, the US-China trade war since 2018, the rise and spread of COVID-19), teams still think about secondary suppliers as a reactive practice, not one to be incorporated into a company's regular or risk-mitigation processes.

AI and Big Data can greatly shorten the time it takes procurement teams to find and vet potential secondary suppliers. Instead of the manual work of finding every relevant supplier, AI works within vast quantities of data to normalize and present the specific information that teams are searching for. In place of searching with no end goal, teams can spend time on the work that can only be done with their uniquely human skills. The support that this technology provides to sourcing specialists saves them and their organization critical time and money.

Best Practices for Low Risk, Strategic Digital Procurement

An engineering firm based in Germany needed to find a secondary supplier its stakeholders could trust after it was determined that their primary supplier was too costly and slow. Their search centered around two main needs: the highest possible quality and flexible delivery times.

Past practices suggested that it would take no fewer than 12 months to identify the supplier that would fit these criteria. But using the AI and Big Data leveraged by the scoutbee team, the firm identified the entire universe of 283 suppliers on the market and flagged the 89 viable options for the team. From there, the firm narrowed the list and had two proposals in less than one month. Powerful digital search and online collaboration on a single platform now means that suppliers can be onboarded far more rapidly than ever before.

For the procurement industry to ensure the most strategic and proactive digital sourcing opportunities with the lowest possible risk, it is important for teams to access the data that will give them the kind of market intelligence required today. The key pieces of information that are available and most valuable today include pricing benchmarks of the entire supply base and access to financials and corporate sustainability certifications.

It is clear that procurement's digital transformation is essential to the future success of every organization, including the ability to be competitive and remain operational in a crisis. While there is always some risk with adopting new practices, the greatest risk for procurement could be to ignore technology.

SC
MR