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 is not yet in sight. The total costs, in terms of human lives, ruined businesses and GDP impact, are still just projections in the array of charts presented daily by statisticians and data modellers. There are, however, already some clear lessons for 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.
Before diving into specifics, it is important to note how the crisis has emphasised 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 are uncertain, cash is once again king and procurement and accounts payable leaders are being asked to forecast and preserve cash wherever possible. To maximise 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 a far better position to achieve these objectives. A recent Forrester study on Effective Procurement Performance Measurement found that advanced procurement organisations measured and assessed performance based on many more, and more strategic objectives than less mature organisations. Some 46% of advanced procurement departments, for example, had bonuses tied to KPIs on supplier risk performance and supply chain disruptions, versus one-third of less mature organisations.
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, procurement processes and technology. Teams can’t establish that overnight. Companies that maintained zero-sum, hard negotiation relationships with suppliers cannot suddenly reset those in a more collaborative mould. Those that selected more rigid technology that is good at driving standard process efficiencies but less suited to 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 supply chain risk. In a financial portfolio, it is quite possible to have two higher-risk investments that deliver lower overall portfolio risk than two 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 onshoring 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 optimising 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 organisations 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 Wuhan, 938 have one or more Tier-2 suppliers in the region. Hence, companies’ 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 the second and third tiers.
Leaders must ensure they have the processes and systems to support doing so at scale. The key is 360-degree supplier visibility, which must include lower-tier suppliers if organisations are to truly understand their exposure to various scenarios or 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 organisations 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 as a result of 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 a customer of choice, which will minimise your risk of supply disruption the next time demand outstrips supply, as is a common scenario for many items today.
In this crisis, procurement is having to get more done and do it faster than ever before. Digitisation 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, digitisation 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 cannot do their jobs.
Unfortunately, digitisation 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 organisations that are woefully behind. A 2019 Forrester study on Executing a Successful Digital Transformation found that 76% of leaders have digitised less than half of any source-to-pay process while 43% had digitised less than one-quarter.
The crisis has also emphasised the significance of the gap in performance between procurement leaders and laggards, which is having a major impact on their organisations to cope. A Forrester study conducted just before the crisis exploded beyond China, Effective Procurement Performance Measurement, revealed stark and wide-sweeping contrasts in performance in areas critical to managing the crisis.
Only 53% of Procurement organisations reported that collaboration with suppliers occurs regularly and drives tangible incremental. Breaking this down by maturity found 93% for advanced organisations 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% compared with 16%. Some 91% of advanced organisations managed all spend via category management and strategic sourcing processes in contrast with 16% of beginners.
Higher levels of planned investment and a greater focus on addressing obstacles indicate this gap is only set to increase. Less mature procurement organisations are increasingly putting their organisations 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 organisations 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. Once the dust settles and you have a moment to catch your breath, act aggressively and quickly if your organisation 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.
Procurement Leaders is proud to have Ivalua as research partners for the Data & Innovation stream. Alex Saric is Ivalua’s CMO.
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This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.