The amount of company expenditures that procurement globally oversees is just breathtaking. The influence of Fortune 500 firms alone amounted to around 16 trillion USD in 2019 (43% of total revenue, sources: CAPS, Forbes, own research). It is the procurement function that decides how this money is spent: we select the suppliers, we negotiate the commercial contracts, and ultimately it is us who are responsible for the underlying supply chains, their conditions and standards. These very tasks of designing, implementing and managing supply chains have come under heavy scrutiny, following several substantial outages amidst one of the severest health and potentially the most serious economic crisis in recent history: COVID-19.
In many respects has this pandemic lifted the carpet and exposed parts of certain business operations that the general public is normally carefully shielded away from. Sudden supply and production outages for products and services that we all consume daily, that we love and cherish, exposed the vulnerability of our economic system. The crisis shed light into the, at times, ugly state of certain supply chains and with it put the role of the procurement function into the limelight of the public debate.
For instance, the production outages that we experienced in the pharmaceutical sector early on during the pandemic. Many critical active ingredients for certain medications (as simple as painkillers and as complex as certain heart medications) had been predominantly sourced out of China for years. China, one of the first countries affected by the virus, had to close its production sites ultimately to contain the spread of the virus and to protect its workforce. With no alternative supply chains in place, pharma companies around the world were faced with extreme difficulties to assure this essential supply to the market. Only by sheer luck could a larger shortage for the affected medications be avoided by proactive rationing measures that were put in place in markets, such as Germany for instance. What had gone wrong in the design, implementation and management of these supply chains?
Have we failed in doing our job as procurement professionals?
It is important to stress the point that we live in a highly globally interdependent world. As countries, we have specialized our industries in different tasks over many decades to increase productivity which led to a compartmentalization and dispersion of supply chain activities. From that backdrop, supplier concentration in a certain geographical region can be at least explained to a certain degree.
Furthermore, we need to acknowledge the fact that no company can fully prepare for a shock of this proportion and prevent all adverse effects that can result from it. No supply chain will ever be fully crisis proof. At least not without incurring excessive and most likely uneconomical costs in the form of buffer inventories and duplication in activities. The outages that we have experienced though, especially in the pharmaceutical sector, have exposed extreme vulnerabilities of long lead times, inflexible supply, and single source supply chains. These issues will trigger, additionally fueled by political pressures, the required review on how to strike a renewed, right balance between the level of risk, flexibility and cost.
As procurement professionals, we will lead these reevaluations and provide our expert opinion on available options in the market. We will propose solutions to our stakeholders on how to redesign and adapt the supply chain setups moving forward. Our role has always been, and continues to be, to provide solutions that clearly highlight risks and benefits to the business.
So, we have not failed then as procurement function? Or have we?
In my view it is not these supply issues that pose the real problem, that have tarnished the reputation of our profession, that question our ability to manage supply chains in the best interest of our stakeholders and the end consumer. It is not these rather obvious issues of determining the right level of safety stocks, the right number of qualified suppliers, the adequate length of lead times that is shaking our function in its foundation.
It is rather those supply chain issues that result from shortcomings in working and living conditions of employees and staff on the supplier’s side that are cause for heightened concern to the procurement function. Conditions that we seem to let our suppliers get away with at best or that we turn a blind eye to at worst.
The most recent incidences in some meat processing and food packing sites in the US, Germany and the UK that led to closures and reduced production due to severe COVID-19 outbreaks amongst workers with the number of cases far above the national average, have exposed procurement’s apparent complacency to address the obvious ethical and moral concerns with regards to working conditions proactively and consistently. These are the type of supply chain issues that cast doubt if we are doing our job right as procurement professionals.
The clusters of infections were attributed to the working and predominantly the living conditions of the factory workers. Conditions that led to spiraling numbers of COVID-19 infections. Not only did the working and living standards expose these essential workers to an elevated risk of contracting and potentially dying from COVID-19, but also put essential food supply chains at risk. The underlying operational model of these food processing sites came under intense scrutiny and critic as the workforce is generally brought in from foreign countries through staffing agencies, sometimes 1000s of kilometers away from the location of the production site. The staffing agency provides housing, which normally consists of shared rooms (in some cases with up to 6 people sharing 1 room) with at least questionable hygienic standards. All companies and 3rd parties involved seem to follow all legal requirements and local standards. It is a lawful supply chain set up. But is it also the right supply chain set up? Is it morally and ethically the right supply chain setup for the food that we all consume daily?
Many will argue that it is down to the regulatory bodies to define what is right and what is not. It is up to them to implement stricter rules for the affected businesses if indeed required. Others will argue that better working conditions for workers will result in higher food prices which in the end the consumer is not willing to absorb. Food production and food processing is a complex, multi-facetted topic with no easy answers. It touches many different aspects of our society and economy, from globalization, labor shortages, food habits, propensity to consume, consumer willingness to pay higher food prices, legal standards, etc.
Independent of these complexities, as buying function, we should ask ourselves, if we, individually and personally, really believe that these working conditions are indeed acceptable? Is this indeed the right supply chain setup to entertain? If we were the responsible B2B buyer for meat products in this particular case, would we have lifted the carpet and challenged our suppliers on these working conditions? Would we have looked behind the curtains? Would we have flagged risks to and challenged our businesses and internal stakeholders on these industry practices? Would we have considered how this supply chain affects end consumer sentiment when exposed? Would we have deliberated on how our business was impacted if we shared transparently the supply chain set up with the public?
I am not privy of what the respective buyers in these specific cases have done or omitted to do. To me, this particular case is an example that can be extrapolated onto many different areas where we have observed an increasing disparity between procurement’s approach of blindly accepting minimum legal standards within their supply chains and its inherent ethical role and moral responsibilities to question and advance supply conditions in the industries and suppliers they manage. Far too often have we seemed to rectify a supply chain only after the fact, after a public outcry occurred that unearthed unacceptable conditions with regards to environmental standards, sustainability factors, nutritional values, labor standards, etc.
Whilst procurement has not the legal power to set rules and regulations, nor are we always the ultimate decision maker in our business, we do have the commercial power to shape and influence industry standards. It is us that negotiate commercial contracts that discuss standards and that enforce audits. It is here, in the B2B relationship between procurement professional and B2B supplier organization where change can and has to begin.
As procurement, we are the custodian of our company’s supply chains.
We need to make sure that our supply chains represent the values and ethics our businesses stand for. It is not your CEO that walks the aisles of the slaughterhouse to assess supplier standards. It is not your CFO that is privy of working conditions and that negotiates the commercial agreement with your supplier. It is you, the procurement professional that fulfills that role.
What we seem to have forgotten is that we ultimately represent the end consumer’s interests vis-à-vis our B2B supplier base. Today’s consumer expects businesses not just to be a law-abiding corporate citizen but to lead change through setting moral and ethical guidelines in their operations. This goes above and beyond the question of legal compliance. It is more than just following local and regional regulations, obtaining certifications, or serving lip services to NGO pledges. It is also no longer good enough to put the finger at politicians arguing that they would need to take the lead in changing the standards to provide a level playing field before procurement can take action.
Our mission as professional buyers has always been to implement supply chains and supplier relationships that meet the needs of our organizations, that balance risk and reward appropriately and transparently, that support our companies in growing sales sustainably. Our goal has always been to deliver the right supply chains that provide the end consumer with confidence in what is sold to them, making them delighted ambassadors of our products and services.
Let’s recalibrate our moral compass to accomplish that original mission of ours again. Let’s lift the carpets and open the closets in our supply chains and address the unsustainable issues in our supply chain pro-actively and transparently. It is exactly this what your CEO and CFO are expecting from you. And it is exactly this that we owe as procurement professional to society.
