A Strategy for Recession Planning in Procurement

A Strategy for Recession Planning in Procurement

A Strategy for Recession Planning in Procurement

With the talks of economic uncertainty, ongoing geopolitical issues, and a potential recession doing the rounds, supply chains are feeling the first impact post-pandemic aftermath. High inflation rates and squeezing spending capabilities are clouding the aggressive plans of companies to refocus their investment to increase efficiency. Hence, the shift is towards balancing growth as well as profitability. 

So, what is the role of supply chain and procurement leaders here? To control costs and manage the demand volatility, you need to develop short and long-term strategies that give your business the much-needed flexibility to operate in times of economic downturn. 

Here’s your quick guide to preparing and protecting your business from a looming recession. 

What Is the Difference Between Past Recessions and Today’s Situation 

Before you start strategizing, it is important to understand how the past economic downturns have been different from today.  

Undoubtedly, the last couple of years have been very volatile for supply chains and many experts agree that the volume of supply, talent and freight has reduced. The primary reasons are travel restrictions affecting both freight and labour movement, the tight labour market, and a reduction in safety stocks and critical resources. 

Additionally, today’s markets are supply-constrained as opposed to demand-driven during previous recessions. Earlier, the companies entered into recession with appropriate levels of inventory to meet the demand but instead had to face the problem of holding high inventory and associated costs due to a sudden drop in demand. Whereas, today, the supply is not often able to meet the demand. 

But it is not all bad news. Companies are moving in the right direction but need to reconsider their investment in both talent and technology. Given today’s markets, it is difficult to overcome inflation but businesses can beat the competition to emerge resilient by controlling spends, efficiently managing supplier relationships, and improving visibility. 

Now Is the Right Time to Set the Course!

Here are three actions to get businesses prepared. 

  • Plan cost reduction strategy based on resource bottlenecks: Currently, supply chains are finding it difficult to meet the demand. Use this to identify the constraints and plan on the volume of your raw material, inventory to carry (work in progress), etc. 
  • Reassess your business’ risk appetite: It is not always the case that the supply chain will recover from the previous event before the next one strikes. It is important that you re-evaluate and readjust your risk appetite according to the current market. 

Take into account projections for recession recovery: When making decisions, consider the duration and depth of the recession, pace or rate of recovery, etc. to plan for demand and critical resources.

Strategies to Recession-Proof Your Business 

Procurement leaders and professionals should consider the following strategies when planning for a looming recession. 

  • Manage business spends

In the short term, business spend management is an effective way to achieve cost savings. 

You may ask the following questions when auditing your business spends.

  • What is your spend policy and do you need to revise it? 
  • What is your discretionary spend?
  • Who is the last responsible party/person for this spend?
  • Who is the approving authority and what are they approving? 
  • Have you identified any trends based on role, department, function, and/or project?
  • Are there any bottlenecks in acquiring the goods and/or services that are affecting your team’s job?
  • Can you streamline procure-to-pay (P2P) during a recession?

Here are some measures you can follow:

  • Set up effective pre-approvals on spends to avoid unnecessary diversions from your budget.
  • Increase sourcing reach and strategic procurement to manage and reduce inflation in your supply chain. 
  • Utilise early payment discounts or card payments to optimise your payments for better management of the working capital. 
  • Monitor and prepare for ESG regulations 

You need to be aware of the new environmental, social, and governance (ESG) policies. This is important for procurement as these regulations are directly tied to your supply chain. For instance, reporting total emissions is one such requirement. You need to implement data reporting capabilities across your supply chain to stay on top of ESG regulations. Deviation at the regional or national level may lead to heavy fines or penalties and if you operate on a larger scale or globally, these can multiply, leading to financial problems. 

  • Do not shy away from automation and digital investments

Procurement teams should invest in supply chain solutions such as digital procurement platforms. In fact, according to a survey by Gartner, 78% of CFOs plan to maintain or increase enterprise-wide digital investments in the next two years despite the rise in inflation. It has been maintained that efficiency saving can help fund digital investments and automation of back-office tasks can help retain digital talent. 

Investment in automation tools including supply chain management platform and procure-to-pay software can make it much easier to improve operational efficiency, increase productivity, and streamline and automate day-to-day processes including business spend management, cost optimisation in procurement using spend analytics, vendor management, contract management, reconciliation, e-invoicing, increasing access to local suppliers, and much more. It will also help improve visibility and transparency in workflows by providing access to real-time data at your fingertips. 

All these functionalities can collectively not only help you save resources but also equip you with better risk mitigation strategies which become indispensable during the recession. It comes as no surprise that only 30% of companies have a supply risk solution in place. 

  • Prepare well for economic uncertainty

During such downturns, you need to operate despite budget freezes. This means you need to dive deeper into your trends and forecasts.

  • Forecast and budget for different scenarios.
  • Evaluate different runway models.
  • Strengthen internal controls on spending approvals. For instance, you can get the CFO or board of directors as final gatekeepers to keep spends in check.
  • Carry out regular spend analysis and reviews to detect variances. 
  • Look out for alternative options with your vendors.
  • Review your current contracts, recurring spends, and contracts which need to be renewed. Assess what can be deferred or delayed and if some contracts need renegotiation. 
  • Have a business continuity plan (BCP) in place 

This critical document outlines how your business will continue to operate during a sudden or unplanned disruption or event. It details all contingencies for different business resources and processes that might get affected and will help you react quickly and efficiently. 

  • Work on operational inefficiencies

When growth slows down, it becomes more critical to improving efficiency. Here are some tips. 

  • Use tools that facilitate easy communication for spend approvals, etc. A procurement platform can provide your team with an interactive dashboard that eases communication and expedites processes. 
  • Centrally document and store all processes or workflows for vendor onboarding, vendor relationship management, purchase requests, purchase orders, approvals, etc.  
  • Use digital tools to enable remote seamless working. In fact, procurement software can easily integrate with ERP and SAP software to make accounting, reconciliation and other back-office operations quick and efficient. 

You should also forge strong relationships with local suppliers as part of vendor management to reduce product lead times and minimise transportation costs as it can have a consequential effect during the recession.  

Final Word 

The current ambiguous situation has got supply chain and procurement leaders worried and working on strategies that can protect their businesses. Identifying the difference between the previous recession and today’s outlook, understanding recession recovery projections, and addressing major areas of concern including business spend management, ESG regulations, operational inefficiencies and most importantly, lack of automation should be prioritized in your recession planning. 

Digital procurement platforms such as Induzbuy are not only affordable but also an indispensable part of your strategy for recession planning! With the capability to automate critical procurement-to-pay processes, it can strengthen your cost-reduction measures and operational efficiency. To know more, get in touch with us today!