10 Procurement Challenges the Manufacturing Sector Faces

Let’s start with a painful truth (more painful for some than others): global commerce and the economy are more fragile than we thought just a few years ago, requiring new thinking and new approaches.

Business models, processes, and supply chains largely functioned normally if there were no major geopolitical or societal upsets. Bad weather? We can take that into account. New customs regulations? Foreseeable. Civil unrest in a distant land? It happens, but there are ways around it. These dilemmas in the day-to-day operations of procurement did little to disturb embedded processes in manufacturing companies.

But in 2022, several factors converged to create intense pressure and a series of crisis scenarios, all contributing to supply chain risk. After a price peak in September 2021, container prices remained immensely high for a long time in the following year. Ships were unable to leave ports, inflation and recession put pressure on the markets, and many established transport routes disappeared.

Energy prices made production barely profitable in some cases, if at all. COVID-19 persisted in parts of the world, most notably China. Then there’s the war in Ukraine and dozens of other challenges for companies and the global economy.

Supply chain sustainability is also a key focus for organisations, with many now committed to working with suppliers to lessen their environment and positively impact the people and communities in and around their operations.

So, what’s next for manufacturers and companies in 2023?

Challenge #1: The Relationship Between Cost and Risk has Changed

The age-old mantra that you should always try to consolidate spending with a single supplier to drive down cost is now a thing of the past. The negative influence on risk management is too great in direct procurement categories.

If your single supplier experiences a disruption in their production or supply chain, it could impact your ability to operate effectively. Relying on a single supplier might leave you vulnerable to price increases or other unfavourable changes.

Many companies have switched to a multi-sourcing strategy to significantly strengthen their resilience. They re-sorted, rethought and disengaged from emerging or potential supply chain issues in 2022 – at least on a conceptual level or on a small scale.

In 2023, the task for procurement organisations is now to translate this discovery phase into reality and bring it into the breadth of their own procurement.

Challenge #2: With Rising Demad for Locally Sourced Products, their Prices will Rise

Energy shortages in the EU and ongoing COVID-19 outbreaks in China are causing factories to shut down, and you may scramble to find suitable alternative sources of supply.

The Harvard Business Review suggests that the “era of far-flung global supply chains is probably over” and that manufacturers are moving to a regional sourcing and production model. Some call this development “deglobalisation.” In our view, that’s not really the case.

Companies are bringing some suppliers of primary products and components geographically closer to their operational locations – but the globally-oriented way of thinking and acting remains.

Since many manufacturing companies want to expand such a regional model, acting quickly with those new suppliers is essential. Many competitors are nearshoring, in that they are looking for suitable suppliers in a geographically closer vicinity, which means demand is rising there – and, with it, prices. It is, therefore, important to secure quotas at an early stage.

But as Middle East consumers increasingly demand next-day delivery as a norm, reliability and speed of the supply chain have overtaken cost as the most crucial factors.

Challenge #3: Local Suppliers are Under Cost Pressures

It appears that just as suppliers can handle one cost issue, such as the truck driver shortage in Europe, another one arises, like surging energy costs. As a result, some industries are unable to operate profitably or must raise their prices for new orders. They are walking a tightrope between current prices and the risk that their production costs may look completely different four weeks after their offer has been accepted.

An example of this in the Middle East is the growing demand for more convenience, healthier options and locally sourced products when it comes to food items in the region. However, the disruption of agriculture supply chains and the subsequent increase in grain prices because of the ongoing Russian war on Ukraine have added pressure and will contribute to rising inflation.

This, in turn, presents a risk to their customers in procurement organisations. Do we get tough on pricing, or would that risk putting our suppliers, or our suppliers’ suppliers, out of business? There is always an answer to such a question, but we need to be able to quantify the costs and risks.

Challenge #4: To Make Better Decisions, You Need Transparency

If you want to make valid decisions as a company and purchaser in this mixed situation, you need one thing above all else – transparency. This can only be achieved with the correct data. To be more precise, “data-based transparency.” Organisations must also deal with disruptions and bottlenecks in the supply chain in 2023. When and where will they occur? What will be the impact? What are the alternatives?

Knowledge is the basis for clear decision-making on supplier management, from verification of quality certificates to visibility over spend and alternative sources of supply.

In the case of our client NORMA Group, the company brought transparency to its operations by standardising and digitalising its internal purchasing process across 27 global plants.

However, procurement processes have generally become so complex that they escape human oversight. Digital transformation is, therefore, a precondition for full transparency.

Challenge #5: Leveraging Technology in an Inflationary Environment

Inflation is impacting many parts of the supply chain – the costs of production and logistics as well as raw materials, energy and transportation.

Software applications can help improve planning in this inflationary environment and anticipate disruptions.

For example, analytics software can help organisations to model various scenarios to answer questions such as, what will be the impact of rising costs on demand? To what extent must we adjust the volumes of materials and components we buy? How much of the additional costs can we pass on to customers, and how much can we absorb?

More than ever, manufacturing companies need to harmonise all participants in their supply chains and achieve cross-functional collaboration around issues such as demand forecasting to make their procurement processes more targeted, detailed, and agile.

Challenge #6: Cutting Costs to Reduce Pressure on Margins

Where cost pressure arises, “adjusting screws” are needed to alleviate it. For example, a design-to-cost (DTC) methodology can be applied, which allows costs to be considered throughout the entire new product development process. This can save 15-40% of product development time and material costs.

However, this process requires seamless collaboration and information sharing between all teams in product development. If procurement is involved early in DTC (i.e., the design phase), it can make an important contribution to material availability or stable supply chains.

Challenge #7: Scenario Planning with the Digital Factory

In many areas, there are already “digital twins” – digital representations of real situations that can be used to run through “what if” scenarios. For the evaluation of design and manufacturing alternatives, some manufacturers are already working with digital twin factories.

Such a digital factory contains all the key elements that you’d encounter if you entered a production facility in real life – including thousands of different machines and material types as well as labour costs.

This allows manufacturers to simulate feasibility analysis, process optimisation and cost feedback to optimise their real-world production, reduce changes and get products to market faster.

Procurement teams also use digital factories to compare production environments based on manufacturing criteria to determine site or supplier selection and production costs. This can make production more cost-effective, faster and more flexible.

Challenge #8: Centralised Information for Centralised Processes

Spend analytics, category management, supplier management, and sourcing are interconnected functions that, when supported by centralised information and “one version of the truth,” enable organisations to optimise costs, improve supplier relationships, drive efficiencies, and make informed decisions to achieve procurement goals.

The more you diversify your supplier base, the more important it is to centralise and consolidate data management – otherwise, you not only forgo important efficiencies but also risk introducing new inefficiencies.

This is an important concept to understand and crucial when searching for new suppliers, renegotiating agreements, or securing limited supplies in important categories during times of shortage.

In the future, companies will increasingly have to manage these and other processes centrally and digitally to sustain and enhance competitiveness.

Challenge #9: Supply Chain Due Diligence and ESG

One of the most significant emerging challenges is limiting environmental and labour risks in the supply chain.

New laws and initiatives based on the UN Guiding Principles on Business and Human Rights are emerging. One of the first is the German Supply Chain Due Diligence Law, which came into force this year and is now a legislative blueprint for the rest of the EU.

Given the continuing global nature of supply chains, such laws have a worldwide ripple effect. The Middle East is not immune to the growing need for legislation to manage potential human rights and environmental abuses in the supply chain.

The Middle East is addressing the growing need to manage environmental issues and human rights in the supply chain, for example, through the UAE Vision 2030, with several key pillars actively addressing concerns and promoting the country as a global partner and an attractive and influential economic hub.

Legislation aside, manufacturing organisations are under increasing pressure from end customers to ensure they source ethically. Complying with such legislation and consumer pressure can only be achieved digitally because the flood of issues and risks can no longer be controlled manually – and legislators are likely to promote or prohibit certain behaviour patterns in the future.

Consumers are highly sensitive to corporate stances and practices regarding social responsibility. They seek assurance that companies operate in a socially and environmentally conscious manner. Given the prevalence of social media, customers can quickly disseminate news of scandals, making repercussions of a supply chain mishap potentially catastrophic. To safeguard themselves, companies should abide by all relevant laws and regulations, gather essential data, and establish a digital and fully transparent supply chain.

Forward-thinking companies are already making sustainability a key business focus. In doing so, they are linking their environmental, social and governance (ESG) commitments to measurable targets in procurement, information technology, manufacturing and other operations.

Challenge #10: Dematerialisation and Decarbonisation

We are undergoing fundamental societal changes on a scale unseen for decades, driven as much by technological change as by climate issues and the reality of finite material resources. The concept of dematerialisation will impact procurement on two fronts. Firstly, we expect paper-based processes to be eliminated in 2023.

Secondly, in terms of production, electronic and digital services are increasingly displacing the manufacture of physical goods. As an obvious example the demise of the CD in 2003 and the DVD in 2008 as people transitioned to streaming services. This trend will further reshape procurement. The much-discussed process of decarbonisation presents an exciting challenge — and multi-billion-dollar opportunities.

As renewable energy costs drop and society legislate in pursuit of climate goals, low-emission products and processes will steadily replace established high-emission ones. This entails yet more disruption to business-as-usual, but in 2023, organizations need to get ahead of the curve on this transition – they will find that the financial rewards outweigh the risks.

Procurement will, of course, play a central role in this transition.