Sourcing and Procurement
COVID-19 – Considerations for procurement and supply chain in commercial organizations
The current COVID-19 pandemic is having a significant impact across all industry sectors. One thematic response for many commercial organisations is an immediate reduction in risk appetite given the uncertainty of times ahead. We are seeing this manifest in the laying off of workers, shutdown of strategic projects and the rapid implementation of business continuity plans.
Cash will be king in the coming months for organisations. For many, access to it will likely be the difference between staying open or going under as the pandemic continues to necessitate drastically different norms in conducting business. Those with strong balance sheets will be better placed to ride out the impact of COVID-19 in our increasingly globalised world.
We may be biased, but we think in times like this, it is the functions of procurement and supply chain that have a chance to shine. For most organisations, anywhere from 40% to 70% of cash generated as revenues heads out the door to third party suppliers and partners across a supply chain that is increasingly complex. And at a time when the vast majority of revenue and earnings forecasts are being thrown out the window, getting your procurement and supply chain operations laser-focused to the task at hand and deploying cash in the right places at the right time is critical to staying afloat.
Below, we offer some thought starters for company leaders to consider in how they use their procurement and supply chain functions to help navigate through choppy waters.
What to do now:
Tighten the belt
As hard as it may be, now is the time to quickly look at all spend and cut back to preserve cash, especially on discretionary spends. Most companies are naturally reducing spend in some categories due to social distancing and travel restrictions but working rapidly with suppliers and partners across the board to prioritise spending is going to be key. You will need suppliers and supply chain partners to work constructively with you now, and in the long term, so start the discussion today if you haven’t already. Different approaches are going to be appropriate by project, by supply channel or by spend category, so getting a very clear view of your spend profile and supply chain network is a must to ensure you don’t cut off your nose to spite your face. Your procurement team should have a detailed view of spend that will form a starting point.
- Know your spend
- Prioritise spend
- Start working constructively with suppliers
Know the landscape
Your supply chain team will have an in depth understanding of the channels and pinch points across the supply chain. Use this opportunity to map the risks across your supply chain. Understand and document what the failure modes in the chain are likely to be and what impact it will have on your operations. Looking at your business value chain through a common assessment framework such as FMECA (Failure Modes, Effects and Criticality Analysis) is a good way to quickly plan for risks we may not have fully contemplated a few months ago.
It is also important to understand what your supply chain is going to need to react to and accommodate. Old school Sales & Operation Planning (S&OP) models aren’t nimble enough for today’s dynamic. Look at utilising Demand Driven Supply Chain tools that enable a much more responsive and cash-efficient supply chain. Finally, get your analytics and reporting aligned – 3 or 6 month old data that is backward looking probably isn’t going to be that useful at the moment.
- Map supply chain network
- Analyse failure points and impacts
- Adjust the way you plan
What to do to recover:
Chart a course
Once business continuity plans are settled and operating, once immediate tasks are complete above, organisations need to focus on how to work toward a ‘new normal’. For every business there will be a different context, but procurement and supply chain functions will be critical to identifying opportunities and needs for change, and facilitating these adjustments through suppliers and partners in the chain. The course for each business to travel will be different but we would expect to see some common pursuits:
- Supplier development – Developing new suppliers in different geographies so as not to be reliant on maybe one source of supply in one country. This has just become a critical focus for many organisations that want to ensure supply security.
- Agile sourcing – New agreements and supply deals likely need to be struck to reflect your new requirements. 6-12 months sourcing processes aren’t going to deliver you cash savings in the timeframe you need it – embrace Agile Sourcing.
- Supplier relationship management – “Relationships make the world go ‘round” – use this opportunity to develop a recovery plan with your key supply partners.
- Scenario analysis – Build upon your FMECA (see above) and go deep on understanding the likely threats in your supply chain. Adjust your operations and build mitigation plans to suit.
- Supply chain planning – Accept that your forecasts will always be wrong and adopt the Demand Driven Methodology to make sure your inventory is strategically placed and sized to maintain supply to your operations and customers in these volatile and uncertain times.
What to do longer term:
In the interests of time and space, I’ll touch on three key points. A global event such as COVID-19 does create opportunity – the Global Financial Crisis / Great Recession of 2008/09 showed us this most recently. Early movers, operating with speed and rigour will reap rewards. Embracing ‘digital’ was likely on the agenda for many organisations before COVID-19, but use the opportunity to get ahead by:
- Re-setting risk – Recast your supply chain operations and risk parameters to build a high reliability and resilient supply chain. The ability of an organisation to address any situation is largely dependent on the structures that have been put in place before the chaos arrives.
- Re-setting your organisation – Adjust your organisation delivery models across procurement and supply chain functions to focus on core business and get the basics right. Optimising the cost base of operations and working more closely with expert service partners will ensure organisations are set for growth.
- Investing in digital – We’ve been saying for a while that speed is essential in the function that procurement and supply chain provides. Embracing digital thinking, technology, automation and customer experience is the way forward more than ever.
There are many high priorities for organisations at this time. Leverage the potential of your procurement and supply chain functions. Talk to us about where to start and how to navigate your way through.