Blog: New Impetus
The current geo-political tensions in the world will continue to present us with major procurement challenges in 2022 and far beyond. We hear from all sides about price increases at suppliers; including sea transport, wood, plastics, pallets, cardboard, sugar, palm oil, from 20% to more than 700%! The Dutch retailer Albert Heijn argued that the 20% increase was “inadequately explained by cost increases,” but Nestlé argued that their price increase is “inevitable” because of global inflation.
Many of the procurement managers I speak today are all very busy with securing supply and/or limiting price inflation. I hear from all sides about price increases at suppliers (including sea transport, wood, plastics, pallets, cardboard, sugar, palm oil) from 20% to more than 700%! In some cases, this leads to so-called 'inflation turmoil' in buyer-supplier relationships. Not so long ago, Dutch retailer Albert Heijn (AH) and Food company Nestlé were in conflict over a price increase. AH argued that the 20% increase was “inadequately explained by cost increases,” but Nestlé argued that their price increase is “inevitable” because of global inflation. Everybody is entitled to their own perceptions.
I recently published an academic article about such perceptional differences together with my colleagues VanPoucke, Wetzels and Pilzak-Blonska. It concerns research in which we collected data on 103 buyer-supplier relationships at a global manufacturer of industrial equipment. We challenge the common idea that buyers and suppliers should always have equal (positive) perceptions about their collaboration and that failing to do so will negatively impact performance and/or lead to unstable collaboration.
This turns out to be a lot more nuanced. For example, our results show that when the buyer's confidence in the mutual collaboration is higher than the supplier's confidence, this has a positive effect on the return on relationship (RoR), but the reverse is also true. In addition, long-term relationships, in which mutual differences are openly discussed, appear to be more resilient and productive in dealing with perceptional differences.
Next to price related concerns, buyers are also very concerned about the availability of various raw materials in the world. “The war in Ukraine will deliver a shock to the global supply and cost of food. For their fertilizer products, YARA buys considerable amounts of essential raw materials in Russia, and these supply chains are now seriously disrupted”, said Svein Tore Holsether (CEO of YARA) recently on BBC World News. In order to build up safety stocks, additional sources are being searched for and extra volumes are being ordered, sometimes even double quantities, with all the associated cost consequences.
In 1961, Professor Forrester (MIT) published for the first time on the disruptive effects of sudden changes in (procurement) demand. This is because it is becoming increasingly difficult for suppliers further down the supply chain (2nd, 3rd and 4th tier suppliers) to correctly predict production volumes, resulting in upswing effects in supply (the so-called 'Bullwhip effect'). Although Forrester had a major impact on supply chain theory, the term Supply Chain Management was not introduced until 20 years later (1982) by consultant Keith Oliver. In an interview with the Financial Times, he spoke about a project he had conducted for Philips in the field of inventory control in times of volatile demand.
A few months later, Peter Kraljic introduced his famous purchasing portfolio model (1983), giving the Purchasing and Supply Management profession new impetus. So, there was a lot of attention for Purchasing and SCM in the Eighties… just like now a period of global crises. Time and time again a crisis proves to be a good breeding ground for innovations.
So, whatever happens in the coming months, let’s at least not waste this crisis, join hands and do whatever we can to give our profession a new impetus again! Let’s develop creative and powerful sourcing and SCM solutions and by that contribute to solving some of today’s pressing supply chain challenges.
Prof dr Frank Rozemeijer
NEVI Professor Procurement and Supply chain management, School of Business and Economics, Maastricht University