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The Indian economy is at a unique and difficult moment: risk of a global recession looms; inflation is uncomfortably high; supply chains are still tangled. And all the while, pressure is increasing on business to do better in terms of social and environmental impact.
While the environment is as challenging as ever, history shows that building resilience is essential. When McKinsey analysed the performance of more than 1,100 companies over the 2008-10 downturn, it found that the top 20 per cent showed resilience and suffered less, recovered faster, then kept going. Here, we look at how purchasing and supply chain leaders can become more resilient and thus work to counter inflation, while fostering lasting growth.
India’s inflation rate, while not as high as in other major markets, is still above the Reserve Bank of India’s upper tolerance limit. Companies would therefore do well to stay focused on minimising the impact of inflation.
And that means those involved in purchasing and supply management need to play a much broader role in managing external volatility. Traditionally, people in these roles have been concerned with simply securing supplies and negotiating prices. They need to see themselves as ‘spend entrepreneurs’, not ‘spend managers’.
As spend entrepreneurs, they can take the lead in establishing much deeper collaboration across the supply chain, design, and manufacturing functions to limit exposure to inflation. For example, one leading heating, ventilation and air conditioning (HVAC) manufacturer worked with its suppliers not only on near-term prices, but also explored with them the next design upgrade to find new cost-reduction possibilities; this also helped the company to closely monitor supplier input costs, leveraging raw material cost models.
Such efforts not only cut costs, now and in the future, but also create longer-term competitive advantage. For this to happen, purchasing and supply-management functions will need to invest in five areas.
Digital infrastructure
The pandemic compressed years of planned digitisation into just a few months. Now is the time to maintain, or even accelerate, the speed and scale of that progress, and to capture value from it. In Europe, one large energy company is building digital value chain twin to create a detailed understanding of the tier-1, tier-2 and tier-3 suppliers to understand risks along the entire value chain.
Data analytics
To be ready to address future purchasing and supply challenges, companies should establish advanced analytics capability so that there is full transparency on external spend. Collaboration is key here: one Indian chemicals manufacturer is collaborating with a third-party solution provider to build forecasting models based on historical market data and trends, for tier-1 and tier-2 suppliers, to forecast supply risks and exposure to inflation through fair degree of accuracy on futures. This is helping the company to balance long and spot purchases.
Supplier capabilities
Supplier engagement approaches are evolving toward deeper partnerships and collaboration. Companies should build a deep understating of what their suppliers can do, through digitally enabled performance evaluations, while working with them on design, specifications, and environmental sustainability.
A global consumer player launched an open innovation programme inviting all its suppliers to partner with an environmental purpose, and another retail chain introduced industry-first science-based targets for supply chain finance program to reduce greenhouse gas emissions.
Internal collaboration
Spend entrepreneurs should take the lead to convene and collaborate with functions such as R&D, manufacturing, and sales and marketing — early and often. As challenges evolve, companies will need to form agile teams that work together in sprints to solve specific supply chain issues and then dissolve.
One Asian metals company established an inflation nerve centre to create an integrated response to rising external costs, with procurement playing an essential role.
People capabilities
Indian companies in all sectors know how difficult it is to attract and retain talent in purchasing and supply management. Spend entrepreneurs will see this as an opportunity, developing attractive employee value propositions and enhancing their staff’s core skills by setting up internal academies.
One leading auto OEM has established a ‘cleansheet academy’ to review the knowledge levels of more than 70 professionals in the procurement function, and rewarding them based on their enhancement of their expertise. In the past and the present, the best Indian companies have adapted to the challenges of inflation and supply scarcity. With the near-term outlook looking stressful, purchasing and supply managers need to recalibrate how they do what they do. Their work will go far in their companies’ riding out the current economic storms.
The writers are with McKinsey & Company
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