Beyond the human side of the Coronavirus disease (COVID-19) crisis, the immediate issues felt by organizations have mostly been caused by unprecedented changes in demand. Revenue has usually either fallen off a cliff (non-grocery brick-and-mortar retail, leisure and hospitality) or it has surged (grocery, personal protective equipment, online non-grocery) causing problems in the supply chain. Some of these issues were exacerbated by a lack of transparency in the structure of these supply chains. The main priorities in this interim period are to restructure the cost and margin base to align your full supply chain, while developing critical skill-sets.
Cost and margin restructuring
Building a cost and margin structure allows the business to survive until the crisis begins to fade. Ideally, the outcome is a transition of existing supplier commitments into the New Normal (when it comes) and thereby manage cash and risks. However, that may not always be possible but the key to success here is to review every commitment on its own merits and then engage with your suppliers to work out the most appropriate transition agreements. While this will help reduce the cost of change, you need to have strong supplier relationships in order to be successful.
We sometimes encounter a belief that suppliers either like you or see you as an important partner because they supply you. While this can be true, the changes that need to be made to the cost and margin structure in the interim require real and much deeper relationships founded on an alignment of objectives. If you are in a position where this has been achieved already, you stand a decent chance of suppliers supporting your changes through their approach and commercial model. If you are still working on achieving that level of relationship, you might struggle or take longer to implement these changes, with all the implications this longer timeline has on cash management. It is times like these where we truly see the benefits of continuous supplier relationship management.
The second item to look at in parallel is margin management in whichever form relevant to the business (EBITDA, intake, gross or net). At a minimum, consider your responses and action plans to these 4 key margin management questions:
1. How will your interim operating model and indirect cost base impact margin performance of your business?
2. Is your current product and service range appropriate to fulfil demand and safeguard commercial requirements?
3. If you have reduced headcount, either temporarily or permanently, are you more reliant on your supply chain? How does that flow through to your margins?
4. Do you understand your supply chain in enough detail to have visibility of all possible margin-impacting bottlenecks and constraints?
Supply chain analysis
Typically, businesses will need 70-90% visibility into their end-to-end supply chains to proactively address choke points that can affect revenue and costs. However, currently, most businesses only have 20% visibility into their full supply chains.
Clearly, this is not a desirable position to be in and must be remedied as quickly as possible. Some of the most critical supply chain-related issues include:
· Small suppliers, beyond Tier 2, integral to the operation of much larger supply chains are at risk of going bankrupt due to cashflow issues.
· Supplier staff may be constrained and supplier IP specific to the business is lost temporarily, or even permanently.
· Excessive international movements of materials throughout the supply chain
A prime example to illustrate many of the above points is the personal protective equipment (PPE) crisis. Political arguments around levels of stock and UK-internal logistics challenges apart, the issues with getting enough PPE into the country have been caused by the supply chain. In hindsight, the dependency on Chinese manufacture pre-crisis was too high. Factories were already at capacity before COVID-19 appeared and clearly this pandemic was not factored into any sourcing strategies.
First these factories were locked down, then a travel ban was imposed grounding 75% of passenger flights, which contribute a lot of cargo capacity and thereby agility in supply chains. This means that though by Easter manufacturing was increasing, the ability to get it from China directly or through intermediaries was constrained. Taking a European view, PPE distributors and wholesalers have now exhausted their stocks and lead times for new orders are counted in weeks using expensive air freight or months using sea freight.
The implications from this example are that commercial and procurement managers need to understand their supply chains in a level of detail that has historically only been required for the most strategic suppliers.
For every tier and level of your supply chain, commercial and procurement teams should understand the liquidity position of suppliers, criticality of the outputs to your businesses, relative power positions and cost structures of fixed vs. flexible costs. Armed with this knowledge throughout your supply chain will allow you to make the correct decisions and ensure the continuity of supply chains. Additionally, it gives you the insights needed to identify new supply opportunities as contingency plans.