SUCCESSFUL PROCUREMENT IN VOLATILE MARKETS

17 August 2020

Current benchmarking findings of the University of St.Gallen

The Institute for Technology Management of the University of St.Gallen, together with IPG, compared procurement risk management approaches of more than 100 industrial companies and awarded the best companies with the "Successful Practice Award". Seven key findings from the benchmarking are presented below.

The ever-increasing dynamics of procurement markets, such as extremely volatile raw material prices, material bottlenecks due to supplier default, financial crises or the increasing complexity and length of supply chains, are increasingly forcing companies to proactively manage procurement risks. For this reason, the Institute for Technology Management at the University of St.Gallen (ITEM-HSG) in cooperation with IPG has conducted the benchmarking "Successful Procurement in Volatile Markets" over the period.

Benchmarking: goals and contents

 

The objective of the benchmarking was the quantitative and qualitative investigation of the current status of procurement risk management in manufacturing companies and the identification of particularly successful approaches. The focus was on tools, methods and strategies for identifying, assessing and reducing procurement risks. The three risk types market price, exchange rate and supply interruptions were classified as particularly important and examined in detail.

The benchmarking process

 

More than 100 manufacturing companies from 9 countries participated in the cross-sector survey. 18 companies qualified for the next round of benchmarking in this first quantitative survey and were put through their paces by means of interviews. The best companies were evaluated by an expert jury based on anonymous case studies and visited individually.

The five companies Atlantic Grupa d.d. (Croatia), Uster Technologies AG (Switzerland), Sika Services AG (Switzerland), Autoneum Management AG (Switzerland) and Sonova AG (Switzerland) convinced the jury of experts with their above-average approaches to procurement risk management and were awarded the "Successful Practice Award" by the ITEM-HSG. Key findings of the benchmarking project are summarized below.

  1. Successful risk management has the support of top management! Systematic procurement risk management in manufacturing companies is usually triggered by the occurrence of crisis situations which require an exceptionally high level of management attention. In particularly successful companies in procurement risk management, this management attention has been sustainably consolidated. Purchasing and risk management are usually integrated into a central Enterprise Risk Management (ERM) system and report directly to the management. The importance of risk management is clearly communicated within the company. In addition, the implementation of necessary risk measures is actively supported by the rapid provision of resources and the alignment of target and bonus systems.
  2. Tools help, but do not replace the thinking process!
    Successful companies are not only well informed about existing theoretical approaches to risk management, but are also able to adapt these approaches to their specific situation. They have systematic tools and methods that guide employees in a structured way through the classic risk management process and visualize risk probabilities and effects. However, these tools and methods do not replace the thought process. Therefore, the appropriate education and training of employees is essential.
  3. Knowledge about connections is essential!
    Successful companies can not only systematically prioritize individual risks, they also know the interrelationships and interactions between the individual risk types. This enables a systematic and targeted approach and the avoidance of undesirable side effects when implementing risk measures.
  4. Cross-functional approaches are needed! Procurement risk management in purchasing cannot be considered in isolation. Integrated approaches, which include functions such as R&D, sales, treasury and external partners, are pursued by successful companies. In addition, purchasing risk management is regularly aligned with the overall strategy.
  5. Hedging has high development potential!
    Financial hedging is a question of corporate philosophy in most companies. Exchange rate risks are already often successfully hedged in cooperation with the company's internal finance departments. However, especially when it comes to hedging market prices by means of derivatives, many companies still react hesitantly because the necessary know-how is lacking in the purchasing departments. By building up this know-how and using financial hedging, successful companies not only manage to better hedge risks, but also achieve targeted cost advantages and gain market share.
  6. Avoid supply interruptions proactively!
    Successful companies avoid supply interruptions by selecting suppliers carefully, informing them transparently about the business situation and conditions, and involving them early on in development and decision-making processes. Good and long-term relationships with suppliers also create security.
  7. Create transparency in the upstream supply chain!
    Supply bottlenecks are increasingly caused by upstream suppliers with whom there is no direct relationship. Successful companies therefore try to create more transparency in the supply chain in a targeted manner and to better understand their upstream supply chain. They are working on solutions for systematic pre-supplier management and are trying to improve critical supply chains sustainably through early safeguarding measures and a better balance of power.

Please explore our Procurement Excellence and Value Chain & Supply Chain Management solution portfolio for more information.

This article was originally published by:  procure.ch – Beschaffungsmanagement

 

Author:
Carsten Vollrath
CEO @ Swiss IPG Partners Group

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