Events in the last couple of weeks that will significantly impact the global economy caught my attention as they are likely to affect international supply chains for years to come. The world is just limping back from COVID, but all the money pumped in to get the world back on track is delivering a double whammy. The global economy is now reeling under high inflationary pressure while the prime movers of the economy have not yet kick-started. As a result, the sputtering economic engine is creating a recessionary scenario. At least four major economies have increased interest rates, including the US, Bank of England, Brazil, and India. The US central bank has announced its biggest interest rate increase in more than two decades as it toughens its fight against fast-rising prices.
We are in a perfect VUCA world, with a perfect storm brewing—all asset classes are seeing a slump, including gold, a never-before-seen event, and crypto, which is seeing whale selling. The war in Ukraine is not over yet. The decision by the West to completely cut down on Russian oil at this juncture augurs trouble given the current state of the world economy. The supply-side crunch in oil will be damaging to the global supply chain, which is already struggling. You can add one more to that list of portents: inflation management.
The singular focus of chief procurement officers (CPOs) has been to capitalize on price arbitrage on resources (people, materials, and technology) to drive margins. The levers are limited to insourcing, outsourcing, multi-sourcing, bundling, strategic partnerships, etc. In the emerging paradigm where challenges abound, let’s say in commodities, transport, talent, and capacity (if you are looking for chips and semiconductors), it’s clear we are not in a buyers’ market. The demand-supply gap has widened so much that using existing procurement levers will not help manage price inflation in resources in the current scenario.
Procurement has always looked at product specifications as a negotiating lever. The cost has been quality, most times. Yet it need not be so. A classic example of controlling costs without impacting quality is the curious case of MiG-25. When the Soviets conceived of this supersonic combat aircraft, they were unaware of the American SR-71. The Soviets controlled the titanium supply chain, and the CIA was making a ploy to ship it from the Soviet Union to feed the SR-71 supply chain. Yet the Soviets made MiG-25 with stainless steel despite controlling the entire titanium supply chain. Stainless steel (nickel-steel) has high-temperature tolerance and is easier to work with than titanium, making up for its higher weight (30% more than titanium). A more recent example is the switch to Platinum from Palladium in Auto Supply chain
It is possible to drive down direct materials and manufacturing costs without compromising function and quality through intelligent research, design, engineering, and manufacturing. For this to happen, close collaboration of all these functions at the product conceptualization stage is a must, even for highly specialized industries such as aerospace. It will become a necessity for any other sector with fragmented markets. Managing costs in the supply chain cannot be an afterthought—after the product has been designed and tested—but has to be built into the research and development process with inputs taken from procurement on sourcing constraints and leverage.
In the emerging supply chain scenario, we have to look at the design to cost, design to function, and design to source as the most important, best, and most applicable procurement levers. The first two are not new, but design to source means going back to the drawing board. A close collaboration between design, manufacturing, and procurement is essential to manage inflation. More importantly, design plays a significant role in providing alternatives to control price inflation in Directs. In some of the discussions I have had in the semiconductor supply chain with prospects and customers, one thing was clear: those who can bring design and manufacturing together as a supply chain procurement lever are likely to emerge winners.
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