Pain Points in Procurement Series
How Procurement Can Risk-Proof an Organization During a Recession
Five steps procurement can take to risk-proof an organization against the impacts of a looming economic recession.
By Hugo Britt | April 20, 2023
Welcome to Una’s Pain Points in Procurement series. Each week, the Una team will explore one of ten common pain points impacting procurement today, and put forth actionable solutions to each of these challenges.
Are we heading for a recession in 2023? Economists have issued warnings ranging from a “soft landing” with low growth to a prolonged “deep recession” that will stretch well into 2024. A recession means businesses of every size are staring into the abyss of reduced revenue, weakened profitability, and strangled cash flow. Procurement professionals need to pay attention, because the function has a crucial part to play during an economic downturn.
In this article, we share some of the steps procurement can take if the CFO asks for your help in risk-proofing the organization against the impacts of a looming recession.
A time to shine for Sourcing Heroes
We often use the term “Sourcing Hero” here at Una. It’s a particularly apt term when discussing this topic because heroes – so they say – are forged in times of crisis. We saw it happen during the Covid pandemic, and we’ll see it again if (or when) a recession begins to bite.
Through a combination of cost-reduction initiatives and risk-proofing, Sourcing Heroes have an opportunity to save the business from bleak realities such as layoffs, project cuts, and bankruptcy.
But it’s important to avoid the mistake of trying to survive a recession by squeezing your suppliers. Remember, they’re battling with the impacts of the recession too, and demanding additional discounts can rapidly push them into a financially unsustainable situation. This will only make matters worse, as a supplier bankruptcy will disrupt your supply chain.
So, how can procurement risk-proof an organization during a recession without squeezing suppliers?
With a possible recession looming, procurement professionals need to be paying attention. The function has a crucial part to play during an economic downturn.
Procurement risk-proofing during a recession
Consolidate or diversify
There are two schools of thought here. Consolidating suppliers during a recession can provide immediate cost savings, but having all your eggs in one basket carries risk.
Diversifying the supply chain can help mitigate the risk of disruptions and ensure that the organization can continue to function even if your key supplier is unable to fulfill their obligations due to financial stress.
Develop contingency plans
In addition to onboarding alternative suppliers, procurement can develop backup plans for critical goods or services. Having contingency plans in place can help ensure that the organization is prepared for any disruptions that may occur. For example, the business may choose to create a stock buffer by shifting from a Just-in-Time to a Just-in-Case supply chain model, although this may increase warehousing costs.
Focus on cost-saving initiatives
The challenge is to find ways to cut costs without sacrificing quality. Procurement can work with business units to identify cost savings, redesigning processes to eliminate waste and encouraging the use of money-saving technology.
At the same time, engage with suppliers to identify smarter ways of working and cost-saving innovations such as cheaper packaging.
Monitor supplier risk
Procurement can monitor supplier risk by tracking financial health and analyzing the impact of economic conditions on suppliers. This can help identify potential risks before they occur and enable the organization to take proactive measures to mitigate them.
Foster strong supplier relationships
Building strong relationships with suppliers is essential during a recession to help ensure a reliable supply chain and minimize disruptions. By developing strong relationships, procurement can work collaboratively with suppliers to navigate economic challenges and find mutually beneficial solutions.
Risk-proof your organization by joining a GPO
Group purchasing can also reduce risk for an organization during a recession. By joining a GPO, businesses can leverage the collective purchasing power of the group to negotiate better deals with suppliers. This will help reduce costs and improve the financial stability of your organization.
Group purchasing can also help mitigate risk by diversifying the supply chain. By pooling resources with other businesses, you can access a wider range of suppliers and reduce your dependence on any one supplier. This can help ensure a reliable supply chain and minimize disruptions in the event of a recession or other economic challenges.
We know that relationships matter during a recession. GPOs such as Una have strong, established relationships with suppliers, which can help reduce the risk of working with new, untested suppliers. These relationships can help ensure that suppliers are reliable and trustworthy, minimizing the risk of disruptions or supply-chain failures.
GPOs work as an extension of your internal procurement department as an additional resource for efficient sourcing, supplier and contract management. We will help you identify the risks associated with your acquisition plans, establish a credible and reliable long-term strategy and help facilitate implementation through contract negotiation, cost comparison, and finally analysis and optimization on future strategy.
Learn more about reducing your procurement risk by partnering with a GPO.