The COVID-19 pandemic has hugely affected the global population and economy. Although the world witnessed certain glimmers of hope, like the opening of factories in China and the slowing infection rates in Spain and Italy, the crisis is still far from being fully resolved.
The total costs, in terms of damaged businesses, GDP impact, and human lives, are still unclear, and the numbers are always changing. However, there are already a few clear lessons for supply chain and procurement leaders. If you are thinking about procurement outsourcing in 2020 and beyond, keep these in mind to better tackle the crisis effects.
● Balance Procurement Objectives
The Corona crisis has emphasized the importance of supply chain/procurement leaders possessing a balanced set of objectives. Cost still matters. A lot of companies depend on procurement to protect the bottom line amidst the immense top-line pressure and uncertainty. However, it should not be more than other objectives.
Companies with the vision to have balanced procurement objectives are in a better position to fulfill these objectives. A recent study learned that expert procurement firms measured and evaluated performance based on more strategic objectives than amateur organizations.
Nearly 46% of advanced procurement divisions, for instance, had bonuses related to KPIs on supply chain disruptions and supplier risk performance. It is in sharp contrast to what the less-experienced organizations do. Those that assessed and rewarded procurement mainly on cost and not objectives are at a competitive disadvantage at present.
● Diversification in Supplier Portfolio
A few lessons relating to supply chain risk management may still help as businesses find it troublesome to reconfigure their supply base to a growing pandemic. The category managers must consult investment professionals and take a clear portfolio view of supply chain risk. There may be two higher-risk investments in a financial portfolio that lead to lower overall portfolio risk than the lower-risk investments would, due to risk diversification.
The same logic applies to suppliers. Having low-risk suppliers does not reduce the risk exposure anyhow if all face the same risks, like, for instance, being located in the Wuhan area. A lot of firms are trying to manage supply chain disruptions as they did not consider this, and instead, focused on evaluating suppliers individually.
It is not necessary to focus on onshoring or near-shoring, even if many consider these as better approaches. Pulling the supply chain out of one country and into your home nation sounds excellent, except when the virus peaks in the latter while factories in the former resume operations. Whether it is for the next crisis or optimizing supply chain changes to survive the upcoming months, you need to ensure there is a diversification level in your supplier portfolio for particular goods.
● Examine Suppliers Deeply
Several organizations were shocked by supply disruptions that were not caused by their suppliers but by their suppliers’ suppliers. With an increase in procurement outsourcing and supply chains becoming longer and more global, the vulnerabilities have expanded and become harder to measure.
A recent analysis has shown that while several Fortune 1000 firms have one or more Tier – 1 Wuhan-based suppliers, a lot more other firms have Tier – 2 suppliers in the same region. Thereby, companies’ actual exposure is immensely greater than a Tier – 1 supplier analysis would reveal. Thus, while examining a particular supplier’s risk or that of the portfolio of alternates, it is vital to consider the second and third tiers.
You must make sure to have the systems and processes to support doing this at scale. 360-degree supplier visibility is essential, which must consider lower-tier suppliers if businesses want to truly comprehend their exposure to different scenarios or be able to execute effective contingency planning.
● Follow A Collaborative Approach
While using a collaborative approach with suppliers and stakeholders is now considered the most useful step, numerous procurement organizations still resort to conventional ways – beating up suppliers. For example, conveying their financial stress and telling suppliers to drop the contracted prices and settling for later payment. A lot of suppliers do the same too. This short-term and zero-sum approach may lead to a temporary gain, but it always comes at a heavy cost.
In this current crisis, the whole supply chain is suffering. There must be a collaborative approach to address the crucial goals in an effective, yet sustainable way – considering suppliers and customers as partners. You can collaborate on payments based on who is facing the greatest cash flow challenges.
See the overall margins throughout the supply chain, negotiate temporary price adjustments keeping future businesses in mind, and consider each party’s relative financial stress. Once the crisis ends, reward those suppliers/customers that adopted a collaborative approach.
Digitization is a must when it comes to procurement outsourcing amidst this COVID – 19 crisis. It allows the agility that is vital in a crisis, improves access to insights to make better and faster decisions, and lots more. For instance, as procurement specialists now scour contracts to analyze where force majeure conditions apply, the task can become a lot easier with digitization. It can save endless hours by automatically recognizing such contracts.
Evaluating supplier exposure to the growing market conditions can be done through embedded questionnaires. However, digitization gaps are not going to be resolved in just a few weeks. But it is a must, sooner or later, for those companies that are tragically behind.
● Be Aware of the Performance Gap
The crisis has also shown the significance of the performance gap between laggards and procurement leaders. Greater focus on addressing obstacles and higher levels of planned investment indicate this gap will only increase.
The amateur procurement firms are increasingly putting themselves at a competitive disadvantage. They are paying the price today and will pay a heavy one in the next crisis if things do not change. Also, it is not a quick fix, but a vital one.
These lessons will not just help procurement and supply chain leaders, but also people who are thinking about indulging in procurement outsourcing now.