Procurement in the time of The Black Swan

"Procurement can solve the problems of the world", said Bill Hovis at this recent webinar: Managing Supply Chain Fragility and the Conscious Consumer

About 10 years ago there was a famous book called The Black Swan which talked about how businesses needed to be “Anti Fragile”.?What’s the next Black Swan? I just checked my copy of the book, and in the index not a single mention of "pandemic". By their nature, Black Swans are impossible to predict, but what might the next one be? Cyberattack? Energy Crisis? Inflation? Tariffs? National Boycotts??

Here in the UK there was a shortage of Food grade CO2. Its used?to dispense beer, and the threat of The Dog and Duck being unable to serve pints just because two industrial gas plants shut down shows the interconnected nature of our society

Bill Hovis , transformational leader and former Chief Procurement Officer of Coca-Cola observed that in the soft drinks business, shortage of CO2 was called "No bubbles: we got troubles", and that in times of uncertainty the temptation is for every link in the supply chain to increase safety stocks, from Just In Time to "Just In Case".

We were also joined on the webinar by Sebastian Schmid , CPG expert from SAP who noted that even in 2021 we’ve already had several new "Grey Swans": lack of Port Capacity in LA, Shortage of lorry drivers in Europe and that ship blocking the Suez Canal: they are impossible to predict. But what companies can do is learn to adapt quicker.?

Only 49% of consumer products executives can quickly find alternative sources of supply.

A common practice for CPG companies to accelerate time to market when launching new products is to use Contract Manufacturing to test the products. They contract a third party to manufacture the product and test how it performs in the market. The trick is to work with these contract manufacturers as an extension of their own operations: to be able to have visibility of the products’ production status as if it were in a factory downstairs rather than across an ocean.

Never waste a good crisis

Many customers realized the importance to accelerate digitalisation during the pandemic. Take luxury goods company Richemont who had to close some operations due to COVID restrictions. That was inevitable. But SAP and its Business Network allowed them to recover much faster once the restrictions started to ease. They could clearly see where each supplier stood in terms of on-hand inventory and production capacity. No secret stashes of "just in case" pallets.

Engage with suppliers on a "Top to Top" basis

For critical suppliers you need to take it up a notch. Get your senior leadership, such as your CFO or Chief Revenue Officer (someone outside supply chain) to call their CEO.

Moving on, I think we’d all agree CPG consumers are increasingly conscious, kids criticise our grocery choices not based on taste or price, but on what they see on the label. “Dad, this one has palm oil”. “This plastic can’t be recycled”.

Another stat: 21 % of consumer products executives experience sustainability/ethical issues with direct materials/critical spend suppliers. Managing sustainability has become the “third bottom line”, and companies might soon need to start reporting their carbon usage in the same way as their Balance Sheet and P&L.

Treat Sustainability like a Financial Statement

Procurement plays a key role in executing the Sustainability agenda. Procurement is the company’s spend gatekeeper. Procurement determines with which suppliers to do business with or not. With the higher focus on sustainability, the role of Procurement is becoming even more strategic. We know sustainability includes many aspects; if we focus on carbon emissions, this is a very important topic for CPG companies.?

A global problem that needs local solutions

Greenhouse gas emissions are classified into Scope 1, 2 or 3. Scope 1 and 2 are quite straightforward to improve, but they only represent 10 to 20% of CPG companies’ emissions. The bulk of the emissions comes from Scope 3, which are the ones originated in the value chain.??

To tackle Scope 3, Procurement plays a role to drive suppliers to reduce emissions across the supply chain. Procurement professionals are learning about new sources of supply and mechanisms that reduce carbon footprint, such as, regenerative farming, clean energy technologies at suppliers and logistics alternatives, carbon credit markets, carbon taxes, etc.

In Glasgow it became more evident that the science to reduce emissions is well advanced. Many CPG companies have already started the net zero journey but the biggest challenge is to prove it. No-one wants to be accused of just green washing. That’s why hard data is so important.

SAP is now embedding sustainability metrics into solutions and launching new applications so that companies can measure not only the bottom line, but also the Green line.?

Sustainability and profitability are intimately linked together.

Sebastian shared the example of Allbirds , a company that sells footwear and apparel made from eco-friendly superfine Merino wool. Allbirds labels each pair of shoes with its carbon footprint, using SAP to get a robust accurate real-time system, that would also support the company’s growth.

Let's return to our consumer concerned about palm oil, a commodity under scrutiny for deforestation and human rights concerns in tropical regions. Technology can help here as well, for example start-up Greentoken who provide a solution which enables commingled raw materials to be traced to their origin.?

But at the same time, work needs to be done with the supply chain such that costs are kept under control.

Sustainability cannot come with a cost premium

Take India, where poor rural consumers can buy preferred brands of daily consumables like soaps, shampoos, etc. in small pouches at affordable prices. The sachets are not recycled, but so far a reformulated sachet which keeps the product within the price range of the consumer has not been found.

Purpose attracts talent

Companies that live their sustainability goals can attract better talent. Data shows that younger workers are more likely to work for a company whose ethical positions align with their own. So one way to win the so called "war on talent" is to make sure that your sustainability goals are more than just some guff on your corporate website. Be prepared to justify your positions during an interview.

One other observation, this time from Bill. Too often procurement people try and hire other procurement people, and this can end up as a bit of an echo chamber. Procurement needs to "cast a wider net" and to look beyond the traditional fishing grounds.

Don't overfish the procurement pool

Be prepared to find talent from other disciplines. Sales people are great negotiators, a key part of the procurement role for sure. When casting the net, why not take a look at Financial Analysts, Chemical Engineers, Public Relations and many others who have skills that will be needed in reacting to whatever 2022 throws at us.

You can listen to a replay of the webinar and check our web page for additional resources: SAP CPG Industries .