Coronavirus Supply Chain Response: Near-Term Actions to Take Today
- Supply Chain Management
COVID-19 has brought the global economy to its knees. In April, the IMF declared it the “worst economic downturn since the great depression,” and even in areas that are starting to open back up, projections remain bleak.
In the United States, White House advisors recently announced that unemployment rates could remain in double digits into November, painting a dark picture for the American economy. Elsewhere, the virus continues to spread and death tolls continue to rise. For example, in Brazil, where oil, machinery, and metals are among top exports, the death toll may climb to 125,000 as soon as August, according to the New York Times.
As global companies continue to feel the impacts, procurement is at the center of it all. Tasked with reducing spend and keeping the business functioning, procurement leaders need clear steps for managing the crisis. There are some immediate steps you can take to make sure your Coronavirus response protects your business and preserves cash.
Establish Clear Cost Discipline Expectations
Perhaps the most important strategy for getting control of your spend is to effectively communicate throughout your organization the importance of minimizing unnecessary spend. Emphasizing the importance of liquidity and minimizing spend will help get the organization on board.
#ThursdayThought: Bill Franklin of @Discover discusses aligning priorities between the financial and procurement teams and how best to communicate them: https://t.co/t7S4G1dvwh #CFO #leadership #procurement pic.twitter.com/JL3MmizIQU
— JAGGAER (@JaggaerPro) May 7, 2020
There are several strategies for this – whether it’s instituting a “no P.O., no invoice” rule to minimize off-contract spend or blocking non-essential categories. In smaller organizations, some procurement teams are actually requiring every purchase to be approved directly by the CFO. Employees might not want to send their request for an upgraded keyboard or a fourth computer display to the CFO given the current situation. Adapting the approval process can go a long way toward saving cash.
In practice, communicating these changes can be difficult, especially if employees aren’t in the office. In our recent webinar, a poll found that 56% of attendees found office shutdowns and working from home to be the largest impact on their organization so far.
Some organizations have found creative approaches to overcome the distance using their procurement tools. One group updated their terms and conditions, which prompted a message for every end-user the next time they logged in to make a purchase. Others used a scheduled email tool to provide reminder messages to each registered user in the system. So there are plenty of technical ways to do this – it’s just a matter of choosing which you think will be the most effective for your user base.
Managing At-Risk Suppliers
Our poll also showed that 27% of respondents saw supply chain disruptions as their greatest impact, but in March, ISM found that nearly 75% of companies had supply chain disruptions already. The first step with suppliers is to focus on relationships, not just numbers. Look for opportunities to create mutual value and generate win-win agreements. The organizations with the strongest supplier relationships will be the most successful in reevaluating agreements and managing risk, and by being there for your suppliers, you’re establishing a stronger relationship that you’ll carry into the future.
In addition to costs and capacity, procurement teams need to look at each supplier’s financial viability. A key supplier going bankrupt could completely dismantle a supply chain. Similarly, it’s essential to look at suppliers not just based on how much spend volume they account for. Instead, make sure you’re prioritizing your strategic suppliers. They may be crucial to your supply chain even if they’re not the largest vendor by spend volume. Assign criticality ratings to suppliers to better decide where to focus your efforts.
Finally, make sure you’re getting out ahead of potential disruptions. Survey suppliers regularly to stay on top of stock levels and predict any disruptions. In some cases, it may make sense to accelerate purchases of critical stock in case your supplier runs out unexpectedly. This will help eliminate a single point of failure that could threaten your business.
In March, Chinese suppliers were quick to seek force majeure certificates, and the Chinese government was quick to grant them. Nearly 5,000 certificates were granted for contracts worth almost $54 billion. Whether or not these claims will hold up internationally, they raise the importance of examining force majeure clauses in existing contracts. Perhaps more importantly, they emphasize the need to reevaluate how these clauses are written into future contracts. This should be step one for many procurement teams.
Beyond force majeure, procurement teams should look at renegotiating key terms in their purchasing contracts. This goes hand in hand with supplier management, because this is where you may find some of the best opportunities to save money for both you and your suppliers. By defining recovery times and methods alongside your suppliers, you can position yourself for a clear, strategic expansion as the economy recovers from the pandemic.
As a longer-term effort, make sure that your contract lifecycle is properly digitized to help ensure reliability moving forward. With one centralized repository, you can quickly analyze contracts digitally for high risk clauses and key terms.
Consider Your Sourcing Options
Maintaining a ‘solosource’ mentality, relying heavily on one key supplier for large volumes of critical spending, is extremely risky during times of supply chain uncertainty. If that supplier has capacity constraints or financial difficulties, your organization is in trouble. It’s vital to quickly establish an alternative source of supply before something goes wrong.
Taking existing contracts to bid is also a shrewd way to capture potential savings. In many cases, sourcing a new supplier may reveal better price and value that are more consistent with today’s market conditions, which contracts with incumbent suppliers might not reflect. Additionally, suppliers that may previously have been overloaded on capacity could be looking for new customers due to the downturn. Examining potential replacement parts and materials can also save money. Some materials, such as cotton, which is in high demand for masks and other PPE, can be replaced to find savings.
Analyze, Analyze, Analyze
Spend analysis is essential for any procurement team to track savings and identify opportunities to improve.
JAGGAER typically recommends monthly refreshes of spend analysis data to analyze the current state of your spend. However, during times of crisis, you need to have an up-to-date, accurate picture of your spend as often as possible. That’s why JAGGAER recommends biweekly or even weekly data refreshes until the global economy stabilizes and we have a clear picture of what the ‘new normal’ will look like.
Digital spend analysis tools can be invaluable at this stage. By automating many of your data analysis tasks, you generate expanded visibility into spend and free up time for team members to focus on quick response items and value-generating tasks.
Businesses are clearly still facing a difficult time, and may continue to for a while. But if there’s a silver lining here, it’s definitely that procurement is finally getting its due. The importance of a strong procurement function to help the business react and adjust quickly is shining through. If you’re able to respond appropriately, this is the perfect time to show that procurement is truly a strategic, vital function for your organization.