With factories shut down globally, supply prices and lead times skyrocketing, borders closed and more, pandemic-driven supply chain disruptions have crushed the economic outlook. The International Monetary Fund (IMF) recently declared this “Great Lockdown” to be the worst recession in nearly a century.
Procurement is more important than ever in these uncertain times. Effective procurement strategies play an essential role in business continuity through lowering costs, preserving cash, reducing risk, ensuring supply resilience and improving bottom-line performance. But, with the Coronavirus disease (COVID-19) pandemic evolving by the day, where should procurement leaders focus right now?
Procurement practices to implement now, and down the road
Business strength is directly related to the organization’s liquidity and suppliers’ financial health. Procurement and supply chain leaders should proactively assess supplier risk across their entire supply base and mitigate the most immediate and business-critical threats. Success in the long run is about learning from these gaps and putting plans in place that reduce future exposure.
1. Remove single points of failure.
The Institute for Supply Management (ISM) reports lead times are up 200% across the world, and supply prices are changing frequently, which means organizations without alternative sources could end up paying more than budgeted or waiting weeks for critical materials and products to arrive. Or worse, what if a critical and financially stressed supplier went out of business altogether?
Solosource mentalities – especially for strategic goods and services – are extremely risky. And, today’s pandemic highlights the very real need for a plan B.
Frequent supplier identification and thorough due diligence around suppliers’ financial viability – in addition to their overall ability to physically deliver product -- is incredibly important. As more suppliers file for bankruptcy due to the pandemic, having the right information about critical business issues enables procurement and supply chain leaders to take proactive steps at the first signs of financial distress.
Ask suppliers to regularly fill out questionnaires about stock levels and explore options to buy up critical stock in advance and more, so you have a clear picture of how dependent you are on these suppliers and the risk of working with each individual supplier. Also ensure suppliers are aligned with critical certifications such as ISO 22301 for business continuity. This helps minimize the likelihood and impact of disruptive incidents and keeps both your suppliers’ and your own operations up and running during crises like today.
2. Get creative with supplier relationship management.
There’s an incredible opportunity to build stronger relationships with suppliers during this challenging time by being there for them when they need it most. If you know a key supplier is struggling financially, work with finance to determine the best way to offer monetary support. Control over your own spend is a prerequisite and will help you know when and how you can confidently help these suppliers.
Work closely with suppliers to understand what they need, how you can help, and generate win-win opportunities. If you’re there to help your suppliers today, they’ll be even more inclined to collaborate with you in the future -- a powerful dynamic for every business. As such, when their capacity is limited, suppliers are more likely to prioritize the buyers that take care of them.
3. Take a closer look at key contracts.
Over the next few months, start revising contracts with key suppliers. The China Council for the Promotion of International Trade (CCIPT) reports more than 5,000 suppliers in the country have declared force majeure. Organizations need clever and well-prepared management systems to understand how those clauses are set up, when they apply, and how they could potentially be structured differently at the renewal to best protect the business. Incorporate these findings into supplier risk assessments.
Define reasonable recovery times and methods with suppliers, renegotiate key terms and digitize the contract management process, so all information is centralized and can be accessed and analyzed quickly if needed.
4. Learn from today’s crisis: Focus on supplier value and risk vs. spend volume.
Many companies tend to focus their attention on suppliers with which they spend the most, instead of on those that are the most difficult to replace, or the strategic suppliers that directly impact organizational outcomes. Being prepared for widespread or severe supply disruptions requires procurement to engage in holistic supplier management. Carefully map the entire supply chain network to gain an all-encompassing view of where risk exposure lies across all suppliers, regardless of spend.
Where are your raw material suppliers located? Sub-contractors? Third-party logistics providers? Do you have local suppliers that can provide alternative sources of supply in a pinch? Procurement and supply chain success today and tomorrow hinges on supplier traceability and governance. Know how your suppliers connect and break up data siloes that prevent this level of clarity across the supplier landscape. When you have in-depth visibility across tier one, two, and three suppliers in your most important categories, you can manage suppliers strategically and reduce overall risk exposure where it matters most.
Success tomorrow starts today
This global health and economic crisis is ongoing. Every procurement and supply chain leader needs to plan carefully now, not later, to be in the best position to handle future shocks. Success isn’t just about getting through today but managing the impacts long term. Understand what could have been done differently within your organization to manage today’s crisis and apply those lessons to ready your supply chain for the next event – whether it be a natural disaster, trade wars or another economic slowdown.