What are the Supply Chain Management Lessons to Learn from the Covid-19 CrisisProcurement
As I write this blog, the COVID-19 pandemic continues to ravage populations and economies around the world. There are glimmers of hope, such as slowing infection rates in Italy and Spain, and the opening of factories in China, but a true end to the crisis remains out of sight. The total costs, in terms of human lives, disrupted supply chains, ruined businesses and GDP impact, are still just projections in the array of charts presented daily by statisticians and data modelers.
There are, however, already some clear lessons to be learned by Procurement and Supply Chain leaders. Some are too late to help with the current crisis but worth noting to prepare for the next one. Others may still be applied to help businesses better manage the effects of the crisis.
Balance Procurement Objectives
Before diving into specifics, I feel it is important to note how the crisis has emphasized the importance of Procurement / Supply Chain leaders having a balanced set of objectives. Yes, cost still matters. I see boards turning to Procurement to find every opportunity to protect the bottom line in the face of tremendous top line pressure and uncertainty. But not more than other objectives.
Naturally, supply continuity is critical, with global supply chains facing unprecedented disruption. As financing and cash flow is uncertain, cash is once again king and Procurement and AP leaders are being asked to forecast and preserve cash wherever possible. And to maximize the impact of these and other objectives, Procurement needs to be managing all spend and all suppliers. Spend under management is key.
Companies with the foresight to have defined a balanced set of Procurement objectives are in far better position to achieve these objectives. A recent Forrester study on effective Procurement performance measurement found that advanced Procurement organizations measured and assessed performance based on many more, and more strategic objectives than less mature organizations. For example, 46% of advanced Procurement departments had bonuses tied to KPIs on supplier risk performance and supply chain disruptions, versus a third of less mature organizations.
Those that paid lip service to many objectives but measured and rewarded Procurement heavily on cost are at a competitive disadvantage now. Effectively addressing differing (and potentially competing) priorities is not just a matter of attention. It requires different skills and knowledge among the staff, supplier relationships, processes and technology. That can’t be established overnight.
Companies that maintained zero-sum, hard negotiation relationships with suppliers cannot suddenly reset those in a more collaborative mold. Those that selected more rigid technology that is good at driving standard process efficiencies but less so in enabling analysis or connecting stakeholders, or doesn’t address all spend, will struggle to scale efforts.
Some lessons regarding managing supply chain risk may still help in the near term as companies struggle to reconfigure their supply base to an evolving pandemic. First, category managers should look to investment professionals and take a broad portfolio view of supplier risk management. In a financial portfolio, it is quite possible to have 2 higher risk investments that deliver lower overall portfolio risk than 2 lower risk investments would, because of risk diversification (for example, where one increases in value when interest rates rise while the other decreases).
The same applies to suppliers. Having alternate, “low” risk suppliers does not effectively mitigate risk exposure if all are subject to the same risks, such as being based in the Wuhan region. Many companies are facing supply chain disruptions because they did not account for this, instead focusing on assessing suppliers individually.
The answer is not necessarily on-shoring or near-shoring, despite much discussion about these as better approaches. Pulling your supply chain out of China and into your home country sounds great, except when the virus peaks in your country (while Chinese factories resume operations). Whether for the next crisis or optimizing changes to your supply chain to weather the coming months, leaders need to ensure a level of diversification in their supplier portfolio for specific goods.
Too many organizations were surprised by supply disruptions caused not by their suppliers, but their suppliers’ suppliers. As more business has been outsourced and supply chains become longer and more global, the vulnerabilities have grown and become harder to assess. A recent paper by Dun & Bradstreet found that while a not excessive 162 of the Fortune 1000 have one or more Tier 1 suppliers in the Wuhan region of China, 938 have one or more Tier 2 suppliers there. Hence, the actual exposure is drastically greater than a tier 1 supplier analysis would indicate. When assessing the risk of a specific supplier or the portfolio of alternates, it is critical to consider Tier 2/3. Leaders must ensure they have the processes and systems to support doing so at scale. 360 degree supplier visibility is key, and it must be defined to include sub-tier suppliers or you are unlikely to truly understand your exposure to various scenarios, nor be able to conduct effective contingency planning.
While taking a collaborative approach with stakeholders and suppliers is increasingly accepted as the best approach, I still see many Procurement organizations resorting to the old ways – beating up suppliers. “We are under financial stress so you need to help us out by dropping our contracted prices, and accepting later payment.” I see the same from some suppliers – for example those price gouging on ICU ventilators given the spike in demand. That type of short term, zero-sum approach may generate a temporary gain, but at great cost.
In this crisis, as in most, the entire supply chain is suffering. To effectively address the key goals in an effective, sustainable way requires a collaborative approach – thinking of customers and suppliers as partners. Collaborate on payments based on who has the greatest cash flow challenges. Look at overall margins throughout the supply chain and negotiate temporary price adjustments in return for future business, considering the relative financial stress of each party. Be sure to engage the business to understand priorities and challenges before having those discussions with suppliers. And once the crisis passes, reward those customers / suppliers that took a collaborative approach. That is how Procurement establishes a company as customer of choice, which will minimize your risk of supply disruption the next time demand outstrips supply, as is a common scenario for many items today.
In today’s crisis, Procurement is having to get more done, and do it faster than ever before. Digitization is quite simply a must. It enables the agility critical in a crisis, freeing capacity by automating tactical activities, improving access to insights to make faster, better decisions and scaling collaboration across more suppliers and internal stakeholders. For example, as Procurement teams now scour contracts to see where Force Majeure conditions apply, it is key to understand contractual rights and obligations during a crisis. Digitization can save endless hours by automatically identifying such contracts. Assessing supplier exposure to the evolving market conditions can be done en-masse via embedded questionnaires. Manual, paper-based processes that were a nuisance before now mean some employees working at home can’t do their job.
Unfortunately, digitization gaps are not going to be fixed in a matter of weeks, given the need to evaluate requirements, assess and contract with a vendor and then implement. But it is a must, sooner or later, for the majority of organizations that are woefully behind. A 2019 Forrester study on executing a successful digital transformation found that 76% of leaders have digitized less than 50% of any S2P process and 43% less than 25%.
Mind the Gap
The crisis has also emphasized the significance of the gap in performance between Procurement leaders and laggards, which is having a major impact on their organizations to cope. A Forrester study conducted just before the crisis exploded beyond China on effective procurement performance measurement revealed stark and wide sweeping contrasts in performance in areas critical to supply chain risk management during the crisis. Only 53% of Procurement organizations reported that collaboration with suppliers occurs regularly and drives tangible incremental progress. Breaking this down by maturity found 93% for advanced orgs versus only 16% of beginners. As far as reviewing supplier performance regularly, the results were 97% versus 17%. For proactively monitored contracts for risk, 94% vs. 16%. And 91% of advanced organizations managed all spend via category management and strategic sourcing processes vs. 16% of beginners.
Higher levels of planned investment and a greater focus on addressing obstacles indicates this gap is only set to increase. Less mature Procurement organizations are increasingly putting their organizations at a competitive disadvantage. Their businesses are paying the price today and will pay a greater one in the next crisis if this doesn’t change. This is also not a quick fix, but a crucial one.
Procurement and Supply Chain leaders are in the front lines today, and understandably scrambling to help their organizations cope with the COVID-19 crisis. I’d like to salute you all. Your exhaustive efforts are helping not just your business, but your employees, suppliers and customers. Apply those lessons you can to better manage the rest of the crisis. And once the dust settles and you have a moment to catch your breath, act aggressively and quickly if your organization is not among the minority of advanced ones. Address the people, process and system shortcomings to narrow the gaps with more mature competitors. We are all depending on you.