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Critical Eye - Procurement – managing the supply chain in a recession, October 2009

Tim Lawrence
Critical Eye
October 2009 

What do you want from your chief procurement officer? Not every organisation has someone with that title, but no matter. The important thing is that whoever is in charge of procurement has effective control of the supply chain; and managing the supply chain effectively is a matter of life or death right now for a growing number of businesses. So let’s consider what we are asking of this vital cog in the wheel.

In the current recessionary climate, when cost-cutting is at the front of everyone’s minds, there is bound to be immense pressure to source goods and services at the lowest possible price. So should this be the criterion by which procurement decisions are made? Since the original outsourcing of operations was probably made largely on grounds of cost – albeit allied to efficiency – it is inevitable that those same considerations will now apply to the management of the supply chain.

But as recession rears its ugly head, it is worth remembering that your suppliers are no more recession-proof than you are. Just ask companies like Zavvi, the record store, which was so dependent on supplies from EUK, Woolworth’s wholesale distribution business, that the collapse of Woolworths instantly devastated Zavvi’s stocks and forced it to shut down its own website on 2 Dec 2008.

It is certainly arguable that the lower the price charged by the supplier, the greater the risk. Take a look at Mattel, the US toy manufacturer famous for Barbie, which bought many of its toys from Chinese suppliers – until they had to recall more than 1.5million in 2007 owing to their use of lead-based paint. No doubt the price charged by the Chinese manufacturer was an important factor in Mattel’s original sourcing decision, but any improvement in profit margins can hardly have compensated for the massive expense of the recall, and the consequent loss of consumer confidence.

The answer is that although price is bound to be a major factor in your choice of supplier, it must never be an overriding factor. The crucial determinant must be the balance of risk. And that is the why management of risk in the supply chain is becoming a board-level matter, whether or not the board chooses to appoint a chief procurement officer – or indeed, invites that person onto the board.

The only way for businesses to cope in these unnerving times is to review all their risk management processes. Are comprehensive plans in place for high-risk suppliers? Have commodities prices been adequately hedged?
Are quality processes and procedures regularly reviewed with suppliers and tightly controlled?

There are plenty of mitigating actions you can take to reduce these risks - from taking insurance against suppliers defaulting, to dual sourcing, or establishing a plan to buy the supplier if they are so essential to the business strategy that there is no alternative.

Procurement has become the custodian of a number of major risks to the business. Unfortunately, it is also often the first in line when the chief financial officer comes looking to cut costs. So this is where company boards need to be most vigilant. They need to appoint a good chief procurement officer, with sufficient authority and a clear brief to manage risk. And they need to ensure that the CFO does not allow short-term cost-reduction measures to
build up long-term risks to the business.

To protect the company and prevent supply risks spiralling out of control, procurement today needs a thorough, strategic approach to the management of supply risk. I would recommend assessing risk under five principal categories:

Financial: Procurement’s exposure to volatile commodity and currency market movements can throw any strategy into chaos, undermining efforts to adjust price, recover costs or forecast revenues.

Operational: Global sourcing has extended supply chains and increased the risks of disruption, while leaving some organisations unduly dependent on the technological expertise of key suppliers.

Quality: Globalisation of trade has increased choice, but has also exposed businesses to suppliers whose perceptions of quality and adherence to standards may not match those of the business or its best suppliers.

Compliance: Suppliers from less developed countries often struggle to comply with today’s complex regulatory frameworks and heightened awareness of ethical and sustainable sourcing – and if they fall short in these areas, it is the reputation of the procuring organisation that will suffer.

Strategic: Procurement sourcing of components and outsourcing of product to countries where law enforcement is fragile is exposing businesses to loss or theft of IPR, threatening market share and strategic positioning.

An organisation that assesses risk in this way will be surer of its supply chain, and surer of survival in the hardest of times.

Tim Lawrence, Leader of supply chain, PA Consulting Group.

Tim has 20 years of experience in improving global supply chains working within the chemicals, consumer goods and automotive sectors. He has been with PA Consulting for 13 years and is focused on reducing complexity and cost, managing globalisation, improving customer service and improving supply chain visibility in the boardroom.

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