It would be hard to overstate the impact of the Covid-19 pandemic on organizations of practically every type. Industries that were prospering until last year are in bankruptcy now. Customer demand for a wide range of consumer goods has abruptly shifted. Countless public institutions and nonprofit organizations which had been viable until the beginning of this year, are now staring into canyons of debt and implementing draconian cuts. Supply chains have been badly disrupted. And yet the worst of the pandemic may still lie ahead.
Even so, the experience of the past eight months has driven home some important lessons about procurement – both strengths and weaknesses – that are likely to apply well past the time that the virus itself finally subsides. In many instances what Covid has done has been to highlight challenges which existed all along, but they were issues that many regarded as tolerable. However, as a result of the pandemic, the need for addressing them has intensified.
One of the most important issues the pandemic exposed has been that most manufacturers have only a limited view into any of their suppliers beyond Tier One. Most have little understanding of who is supplying their suppliers or those suppliers’ suppliers. As a result, they can be caught off balance, unable to promptly address the ripple effects that problems further down the supply chain can have on their own operations.
Early on in the spread of Covid-19, at least 51,000 companies from all around the world, including 163 of the Fortune 1000, had one or more Tier One suppliers in and around the Wuhan, China industrial zone, where the virus originated, according to Dun & Bradstreet. That’s serious, but it didn’t stop there. At least five million companies, which include nearly all of the Fortune 1000, had one or more Tier Two and Three suppliers in the affected region. That’s huge. Yet the lack of visibility into the condition of those suppliers, where major exposures to disruption had occurred, was almost universal. So here is what we’ve learned from the experience so far:
- Lesson One. Look beyond Tier One. Work on finding out who your suppliers, who they subcontract to and who your suppliers’ suppliers are and on developing ways to monitor the risks they face so you can assess the potential for serious disruptions to your supply chain.
- Lesson Two. Decide whether to stay home or go abroad. Making this decision involves evaluating the reliability of your outsourced suppliers’ suppliers versus re-shoring your supply chain. Until this year, that wasn’t really much of an issue. But things have changed, although addressing the impact of such a move isn’t easy. The central idea is that a global pandemic can disrupt a company’s supply chains. So is outsourcing your company’s manufacturing to China or other far-away countries really a good idea? Or should you try to bring that work back to the U.S. where it’s closer to home and to possibly experience less disruption? The current status of coronavirus in the U.S. and increasing tensions with China should also weigh on that decision. For most companies, the jury is still out.
- Lesson Three. Be careful about changing partners. If you’re thinking of changing suppliers, particularly if you’re going into new regions and different parts of the world, you’ll need some due diligence to evaluate them and understand the risks of any potential new relationships. Particularly if you have been dealing with one particular group of suppliers for a long time, recognize the impact that starting with a new supplier could have on your business. How do you assess that risk? And which suppliers are you replacing?
- Lesson Four. Check supplier finances. For years, monitoring a supplier’s financial stability had been considered a check-box sort of activity for most companies, but now it’s a high-level issue. You need to know if your supplier will be able to survive the next year, particularly if you’re going to commit to them contractually. You’ll have to dig deeper to understand their financials. Find out if they have a contingency plan in the event something does go wrong with their current business. You’ll also need to have a contingency plan of your own for an alternative supplier in case things go south. Agility in the supply chain has become more important than ever.
- Lesson Five. Hospitals need to take charge. The healthcare industry, which has made some amazing advances in clinical care, is generally behind the curve when it comes to supply chain. Their current combination of plummeting revenues, depleted cash reserves and higher costs have made that deficiency a glaring weakness. Most have relinquished some supply chain responsibility to Group Purchasing Organizations that buy for dozens of hospitals. As a result, individual hospitals and hospital groups have little or no contact with suppliers, just with middlemen. When the pandemic hit and supplies were desperately needed, they were left scrambling.
- Lesson Six. Become a customer of choice. Suppliers have preferences just as manufacturers do. When times are difficult, suppliers are more responsive to those who pay in a timely way than those who string out payments and beat them up over pricing. Particularly if your organization is thinking about some sort of collaboration with a supplier, consider what sort of customer that supplier might want to innovate with. And if a favored supplier is in trouble, consider helping them through their difficulties to reinforce your relationship and build a more resilient supply chain.
- Lesson Seven. Look into automation. One of the pandemic’s results has been to accelerate the enterprise digitization process. Transformation initiatives may know consist of smaller, quicker initiatives but this may in the longer be a faster way to achieve the broader digital transformation goals that many have had for years. Looking for solutions to achieve quick wins, such as automating the sourcing process or the contract management process can drive these initiatives forward.