INTERVIEW / EXPERT VIEW – ENTERPRISE-WIDE VALUE
INTERVIEW
Procurement’s problem
So what's the issue? The challenge, says Clements, is too often procurement is being asked to cut back. To cut costs, reduce inventory and provide more ‘just-in-time’. While it may help the balance sheet temporarily and free-up working capital, it very often leaves businesses with little back-up as warehouses are emptied of inventory and cheaper sources of supply are found further afield. In addition to that, continually renegotiating with existing suppliers is neither sustainable nor sensible – especially if what they provide is essential to your business and its standing. “Traditionally the boss goes to procurement and says: ‘I need you to cut costs’. If I’m the head of purchasing, I can get a really cheap product from a third-world country where the price is okay but socially and environmentally it may not be.” Considerations should not only be financial. The value of well-advised procurement can be supported by maintenance, operations, quality and many other departmental leaders. The alternative is to go to a supplier who is doing things right and focused on quality and ethics. It may cost more but it’s less likely to fail or cause irreparable harm to the company’s reputation, balance sheet or share price. “The problem is, where can you put that value on your financial statements?" Traditionally, he says, companies value projects based on their EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortisation. This metric, which is used to evaluate a company's operating performance, doesn't include environmental and social considerations. “Short-term people want to cut costs, but sustainable impacts are measured in years, not financial quarters. The world is being torn apart by these opposing forces.” His business advises companies to consider longer- term outcomes and value the less tangible results of their procurement decisions, not at an EBITDA level but at an enterprise level. “These things may be intangible, but they are where and how you will keep your customers and suppliers. Your image and reputation will improve and people will be willing to pay more for your products.” By working with an industrial accounting department a management bridge – as opposed to the traditional financial bridge – can be developed that clearly highlights the value being created and provides insight into decision making. The graphic depicting the typical stakeholder value tree (see image) highlights the fact that through the current focus on ESG, CSR and non-tangible assets of a company’s strength are captured at a higher level than the purely financial. “Procurement's performance and value-creation strength also needs to be measured in a more modern way. More attuned to the new purpose given to procurement through this modern trend: That of enterprise value.” →
IF EVERYONE HAS THE SAME CONTINGENCIES, YOU NO LONGER HAVE A CONTINUITY PLAN, YOU JUST HAVE ANOTHER DISASTER WAITING TO HAPPEN.
QUICK FACT: THE 120-MILE SUEZ CANAL TURNS A 6,000-MILE 12-DAY JOURNEY AROUND AFRICA INTO A 12-HOUR TRANSIT.
So why did it cause so much trouble? The canal is one of around 10 maritime bottlenecks and the potential for it to become blocked is a known hazard. Too few companies, however, have contingencies in place to mitigate or manage the ramifications of this, as well as many other risks. “We know from what happened in the Suez Canal, and in response to Covid, that only about 10% of companies are getting this right,” says risk expert Adrian Clements. “And it is these one in 10 that had no problems. The rest were either unaware or not tackling it correctly – they single-sourced or had no back-up plan. Why? Because it was only costs that were being reviewed rather than potential opportunities. The full cost benefit of these opportunities and their consequences were not assessed. If the full, non tangible value of risks and opportunities of each action had been considered, a different set of decisions would have been reached.” The president of the AT-IPIC Group, whose past roles include 15 years of managing risk at steel and mining company ArcelorMittal, now advises firms on performance transformation and risk management. In his view, procurement is often hampered by a lack of budget and support to ensure their businesses have the right type and mix of suppliers in place. He believes they should partner with internal stakeholders to argue for increased expenditure for suitable suppliers and contingencies. This requires companies to shift their perspective. Instead of focusing on what things cost upfront, they should think about the financial impact of failing to manage the risks. And not only is there the share price and reputation to consider, but the enterprise-wide value to be gained from getting it right. This additional value can come from greater access to investment, talent, enhanced prestige, a bigger customer base and even the potential to charge more for products or services.
THE BENEFIT OF A GOOD BACK-UP PLAN I N MARCH THIS YEAR, the Suez Canal was obstructed for six days after one of the world’s largest container ships ran aground and drifted diagonally across it. Backing up behind the Ever
Through partnering with internal stakeholders procurement professionals can help their businesses to invest in the right type and mix of suppliers and offer sustainable solutions to customers that don't only focus on cost.
Given – which was itself loaded with 18,300 containers – were more than 360 other ships. The Egypt cut- through is quicker than the alternative sea route and cheaper than airfreight, making it a popular shipping channel. Roughly 12% of global trade passes through it each day. The huge traffic jam put already stretched supply chains under additional strain, impacting whole industries and many thousands of businesses. Yet, it was a predictable risk.
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STATE OF FLUX
2021 GLOBAL SRM RESEARCH REPORT
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