7 Reasons Why the CPO and CSCO are Smarter Together
Over the years, cost and efficiency ruled the supply chain agenda. In light of the global pandemic, resiliency and business continuity came to the forefront for C-suites across businesses and industries. The Chief Supply Chain Officer (CSCO) has gained prominence as organizations tackle disruption and prepare for a post-COVID world.
At the same time, the Chief Purchasing Officer (CPO) has taken on a pivotal role by securing Personal Protective Equipment (PPE) to protect the workforce and by finding alternative sources for direct materials when primary sources failed. In a recent survey by Procurement Leaders, 54% of CPOs reported that they have regular touchpoints with the CEO and are now considered a key stakeholder. The CPO and CSCO have stepped up to the challenges brought forth by COVID-19.
In leading, more mature organizations, we see the CPO and CSCO as very aligned and collaborating closely to support the overall objectives of the business. However, in spite of the best intentions, this is not always the case, due to organizational barriers or technological limitations . As disruptions become the norm, Supply Chain Planning and Source-to-Pay (S2P) cycles need to be increasingly dynamic and intertwined. Beyond the pandemic, there are fundamental business shifts that make such alignment an imperative. Let us examine these:
1. Implementing a ‘China Plus One’ strategy
Part of resiliency comes from having alternate sources of supply. Corporations across industry verticals are looking to diversify sources of supply beyond China. In certain industries, such as apparel and softgoods, significant sourcing beyond China is already prevalent. The automotive industry is increasingly coalescing towards a regional hub and spoke model. In the pharmaceutical industry, due to the heavy dependence on China for KSM (Key Starting Materials) and API (Active Pharma Ingredients), and the highly regulated and capital intensive nature of the industry, lead times are much longer to diversify, but efforts are underway. As organizations pursue these efforts, the CSCO and the CPO together can assess tradeoffs between added resiliency and the cost impact to the supply chain.
2. Rapidly introducing new products and phasing out old ones
With the advent of digital disruptors and nimble startups with asset-lite models, new product launches are taking on more prominence than ever before. In certain industries, such as cosmetics, new product launches contribute to over 30% of annual revenues. Sourcing and supply chains working in a siloed manner can cause significant delays, resulting in lost revenue upside while escalating costs. In conjunction with new product launches, phasing out existing products and components is another area where supply chain and procurement need to work together. Otherwise one might end up with components and raw materials that are wasted.
3. Increasing focus on sustainability and diversity
Shareholder activism around ESG (Environment, Social, and Governance) practices along with employee activism around DEI (Diversity, Equity, and Inclusion) are pressuring companies to show stewardship around social justice and sustainability of their offerings. With over 60% of consumers willing to pay more for sustainable brands, there are commercial reasons as well in ensuring transparency across the supply base. This calls for constant review and changes in supplier mix. If supply chain and procurement teams are not working hand-in-hand, an organization can be caught off guard by bad press; for example, if a supplier is caught engaging in employing child labor or releasing pollutants into the water surrounding their facilities. Such news can have highly adverse consequences in an era of consumer activism empowered through social media.
4. Ensuring supplier liquidity
While supply chain teams may look at sources of supply through the lens of total landed cost and service levels, procurement can ensure the liquidity of the supplier in times of uncertainty by making early payments or providing access to financing. This is critical, especially in industries such as automotive where the supplier base can be highly susceptible to the cyclical nature of the industry. Given a typical car can have over 30,000 components, the exposure to single-source suppliers in an n-tier network is very risky. The procurement team can help vet the supply base and provide the needed support, so that supplier bankruptcies don’t cripple production, the impact of which can be significantly more than if a supplier was paid early.
5. Keeping pace with regulatory changes
Supply chain leaders will need to increasingly tap into their sourcing counterparts to ensure they are staying on top of any regulatory changes that can have significant implications for sourcing. As an example, the new administration in the U.S. is laying out the agenda for the ‘Buy American’ plan which is centered around raising the domestic content requirements and closing loopholes available for purchase of foreign products. Sourcing teams are better equipped to keep tabs on the developments and implications of such regulation and can be trusted advisors to their supply chain counterparts.
6. Preparing for cyber, judicial, and financial risks
As manufacturing and distribution facilities become increasingly cloud-connected through retrofitting equipment or upgrading to new generation equipment, gaining deeper understanding of the reliability and authenticity of the supply base is more critical than ever. A rogue supplier with malicious intent can bring production and distribution processes to a standstill. Procurement organizations can help vet suppliers adequately. Beyond this, by continuously monitoring the supplier base for judicial and financial risks, procurement organizations can provide leading indicators of supplier risks to the supply chain team.
7. Adjusting to changing logistics needs
While organizations over the years have built reasonable competencies with forward logistics, reverse logistics is gaining prominence due to the rise of returns owing to eCommerce and elevated interest in circular supply chains. This is causing supply chain leaders to increasingly look to external providers to help with such needs. Organizations are experiencing wild swings in logistics capacity, as evidenced recently by the excess capacity in the early parts of COVID-19 with port and nationwide lockdowns, only to see demand come roaring back for discretionary spend categories, causing severe bottlenecks with both ocean and over-the-road modes.
As shown by the recent blockage of the Suez Canal, there are many types of unexpected, atypical events that can cause significant logistics disruptions that many of us may have lost sight of. We need to prepare for unexpected and unlikely events, or our companies will pay the price in the years ahead. (See Container backlog, global supply chain disruption from Suez Canal crisis could take months to clear.)
Supply chain logistics teams need to work very closely with sourcing teams to ensure events are run to secure capacity and adequate projections are made for capacity, so they are not opting for spot purchases, which can be an expensive proposition in a heavily constrained environment.
The CPO and CSCO are smarter together
As external factors continue to have outsized influence on businesses and the supply chains associated with them, a tighter alignment and collaboration between the CPO and CSCO will create sustainable competitive advantage for organizations.