I admit that I often take a US centric view to a number of procurement and supply chain related issues on my Spend Matters blog. As someone who has interviewed well over five hundred US providers and consumers of procurement technology and services dating back well before the last recession, I’ve spent the better part of the past decade looking at trends in both rising and downward trending economic climates around procurement
on this side of the pond. From these various discussions, I’ve concluded that there are a number of fundamental differences between the current downturn and the previous ones when it comes to lessons we’ll take away
from this recession in particular. While it would take far more space to share these in expansive detail, I’ll relay the four most important ones in this column. I’ve chosen these based on discussions I’ve had with procurement
executives on this side of the Atlantic, but I think they contain universal lessons.

Watch out for supply risk
The first lesson I’ll note from this downturn almost goes without saying given all the hype around the subject at the moment. And that’s the rising importance and realization that companies must consider supply risk
management as part of the core role of procurement. The last downturn was too short to have a long-term impact on continuity of supply or supply assurance. Few suppliers became insolvent outside of normal levels and those that did could often obtain the necessary financing to emerge from bankruptcy proceedings. Flash forward to 2009 and the case is very different.
Bankruptcy rates are up significantly (more than 50% according to some sources) and the number of liquidations is rising as a percentage of overall bankruptcies at even higher rates. Moreover, since supplier bankruptcies
are a trailing indicator of the economy, it is likely that there are even more bankruptcies to come even if we begin to emerge from the downturn later in 2009. One large US diversified manufacturing organization that I consulted to when I worked for FreeMarkets estimated that a single direct materials supplier bankruptcy cost, on average, $5 million (based on having to switch
suppliers, purchase facilities out of liquidation proceedings, provide debt/equity capital, etc.) In other words, a single supplier bankruptcy can wipe out the millions of dollars of hard-fought savings that companies have worked to achieve. This is why US-based procurement executives are getting
serious about investing in technology, third-party content and focused processes to mitigate and manage supply risk. Whereas there were no budgets to emerge for supply risk from the recession of 2002-2003, it’s a very different case this time around.

Become a true service provider
The second new lesson that companies are taking with them from this downturn is the importance of putting in place a framework to be perceived as a service provider to the business – versus simply as a cost reduction
function. As a result of the forecast length of this downturn – and expected bumpy recovery – progressive companies are finally targeting and implementing sourcing-driven savings in complicated indirect and services categories owned by business stakeholders (e.g., marketing, legal, print, consulting spend). But to make these savings possible – let alone a reality – takes more than just extending a procurement olive branch to key stakeholders. It requires a fundamental rethinking of how best to serve the business – versus simply pursuing activities in the name of savings and shareholder value (which we know is typically the actual goal). By moving
to a services-provider model that places as much emphasis on softer hand-holding and internal sales as on getting the savings job done, leading US procurement executives are realizing they garner far more influence not only in the downturn, but well into the recovery and beyond as well.

Watch inflation carefully
The third key lesson from the current downturn is the importance of putting into place sourcing and contracting strategies that factor into account inflation. The degree of commodity volatility in the past 24 months has been without precedent – at least in my lifetime. Even though prices are well off of 2008 historic highs, nearly everyone I speak with in the procurement
sector these days is very worried about commodity inflation roaring back thanks to the deficit spending that many world governments are actively participating in – not to mention the capacity that many producers have
idled. More advanced companies are beginning to think through aggressive strategies that consider sourcing and contracting tactics that take into account the potential for significant commodity inflation – and commodity
volatility – after the downturn. These tactics can vary significantly, but a few examples include escalation/de-escalation clauses, call options, forwards, collars, etc.

Preserve capital
The fourth and final key lesson for this column that I’ve seen procurement leaders taking with them from this downturn is the importance of working capital to the business – and suppliers. During this recession, the banking crisis – and banking liquidity challenges – have been potentially even more destructive to many businesses than even the volume downturns that have occurred as global economies have fallen. As companies and suppliers
have lost access to cheap money – and in many cases, any third-party debt capital – many have been forced to reexamine their entire operating model, looking for prescient ways to preserve working capital. And those that have it have been looking for ways to profit from it through such programs as early-payment discounts with suppliers. This lesson has forced procurement and finance to work more closely together to design optimal A/P processes and automation approaches that target working capital management reductions – and in some cases working capital deployment – for the long term. Recessions often cause knee-jerk reactions in many organizations. But they’re also times to fundamentally rethink the priorities in our businesses. Fortunately, this time around, leading US procurement organizations are beginning to fundamentally reshape their priorities and overall initiatives. Based on limited discussions I’ve had in recent months with European procurement organizations, I know that many are also grappling with the same issues. The key question for them to consider is not just how they respond to the crisis and current business demands, but the lessons they take with them to emerge from the recession in a more important and
strategic role than ever before.