by Erin McFarlane,
Head of Strategy and Execution at Fairmarkit
As everyone around the globe sits in their homes in isolation, the COVID-19 pandemic is bringing procurement and supply chain management out front and center, shining a spotlight on these leaders and teams like never before.
According to a survey conducted by the Institute for Supply Management (ISM), “almost 75% of U.S. businesses have experienced supply chain disruption as a result of the COVID-19 outbreak” and “44% of respondents do not have a plan to address supply disruptions from China, of which the majority have experienced disruption.”
Additionally, in the US alone, (53%) of “manufacturers expect to experience a change in operations as a result of the spreading COVID-19 outbreak.” Such changes include anything from limiting in-person interactions due to social distancing mandates to managing for worker absences who are sick with the coronavirus.
For procurement leaders and supply chain managers specifically, the global pandemic is creating very real and immediate challenges to maintain their company’s forward momentum. The pressure is on to help now.
Without a diverse and strong sourcing program, one which captures and stores data around not only winning suppliers but secondary and tertiary options, what do you do? Organizations are facing shortages and sometimes outright halts in production.
Stores and operations are closing, sales and profits are sharply declining, and no cash is coming in the door. Organizations are racing to secure liquidity and slashing budgets in attempts to save money and the business.
Fairmarkit’s Head of Strategy, Erin McFarlane, outlines actionable, immediate steps that procurement and supply chain management teams can take to alleviate the top two COVID-19 challenges: emergency sourcing and keeping cash in the door.
Emergency sourcing: Maintaining your supply chain
For many organizations, the first big challenge they are facing is inventory — they can’t get it. Global supply chains have been massively disrupted. As companies look for emergency sources or new sources for their direct and indirect goods to maintain their supply chain, what are the immediate steps procurement and supply chain leaders can take? What should you do if you are operating in this new normal?
1. Identify your operational vulnerabilities
Which parts and/or services are critical to your business operations? Hopefully, you have already worked with your risk and business continuity partners to identify the third parties on whom you are reliant, but if not, this is where to start. Reach out to your business lines, especially executives on the front lines, and inquire about their concerns. Where are inventory levels running low? Where is demand significantly shifted? Have they already seen potential supply chain failures?
Identify the “hot zones” and be ready to get tactical. Category and commodity strategies may need to shift to accommodate immediate needs—be prepared to be reactive as the need arises. You may want to shift personnel from longer-term sourcing projects to support this immediate need and start collecting requirements.
If the supply chain disruption is significantly impacting your organization, it may be helpful to provide a central intake for supply chain concerns so you can prioritize requests. Some example questions to ask in addition to requirements might include:
- My item is (out of stock, running low)
- My service is (unavailable, unreliable)
- This is (slowing down, stopping) production
- This (does, does not) present an immediate safety issue
- This (does, does not) present an immediate regulatory violation
- I (have, do not have) an alternative provider available
2. Look Backward
If you have been sourcing key items for a while, now is the time to dust off your old RFPs and look at the runners-up for your key goods and services. Every sourcing event you don’t need to recreate, or can use shortcuts for, will save time and energy. We often think about RFPs as having value only during the purchasing process but querying those older events now can provide you pre-built backup plans that only need to be refreshed.
Ideally, you have a system or tool that captures all RFPs, RFIs, and RFQs in a central location which can be easily queried for data. If not, add that to your “wish list” and lessons learned for next time.
3. When in doubt, source it out
“When in doubt, source it out” is always my motto, but even more so when the doubt is supply chain disruption and a lack of continuity.
Now is not the time for complex, 600-question requests for proposals that take weeks to design and score. You need to immediately launch a significant number of requests for quotes, ideally from suppliers who are already onboarded to your payment systems. Keep it as simple as possible—you want to know price and availability, and if the supplier provides an exact match for the item or service, or if what they propose is an alternative solution.
Engage your legal, risk, business continuity, and audit teams. Teamwork is essential to determine the best overall course of action. Sometimes, the risk of stepping outside the standard source-to-pay process is far outweighed by the risk of a supply chain failure.
The technology exists to accelerate and automate the tactical sourcing process. Completing hundreds of RFQs using email and phone calls, is possible but will require significant personnel at a time when resources are constrained.
4. Look down the chain
In addition to pricing and availability, try to look down the supply chain. If your secondary distributor for key item sources from the same manufacturer as your primary, you may have less redundancy than you realize.
True supply chain diversity goes to fourth and fifth parties. If you can ask these questions ahead of time, you stave off future problems.
Cash is king: Tightening the belt
For many organizations, the second challenge they are facing is cash—profits are down, cash flow is tight—and right now, cash is king. As companies are looking to tighten the belt and cut budgets in anticipation of the COVID-19 getting worse (before it gets better), and the resulting economic downturn, what are the immediate steps procurement can take? What should you do if you are a procurement leader operating in this new normal?
1. Review planned expenses
Review capital budgets together with your finance and corporate planning departments. Ask yourselves, what capital projects can or should be put on hold? Also, review terminating contracts. Ask for discounts or evaluate cancelation policies. Keep in mind that many contracts automatically renew at 60 – 90 days and vendors or suppliers will absolutely be enforcing this as they experience higher churn rates. Vendors and suppliers would rather reduce your fee than lose you as a customer—all you have to do is ask! Lastly, pay attention to your payment terms. Cash is king! Vendors who are willing to accept longer terms are valuable.
2. Add oversight and approvals
Whatever your current p-card limits are, consider dropping them to remove friction in the process. Increase executive oversight on PRs and POs and increase review of contracts in flight, paying special attention to force majeure clauses and (you guessed it) payment terms.
Additionally, be sure to enforce P2P compliance. “I forgot to create a PO” is not a valid excuse right now.
3. Create a fast lane
Be careful that added oversight/approvals don’t impact critical needs. Allocate a budget and a team (if you haven’t already) to address critical sourcing needs. Consider including finance, legal, risk, audit, and IT/IS to rip down the red tape.
Send urgent crisis-related needs to that team who can evaluate the best approach and use risk-based decision criteria for exceptions to process and policy these urgent requests.
4. Payment terms matter
Consider broadly pushing your payment terms (Net30 standard to Net45) on new POs to non-contracted suppliers. Be sure to ask about payment terms in all negotiations—do not assume!
5. When in doubt, source it out (again, for the people in the back!)
Many things you think are single-source, aren’t. Sourcing is inarguably the best way to deliver substantial savings to the bottom line. Sourcing doesn’t mean you have to switch suppliers—it means you have leverage and competitive data for negotiation. Use that to your advantage!
6. Take care of your vital suppliers
Create an offshoot of the fast lane and identify the suppliers who are critical to your business operations. Don’t contribute to their hardship—be a partner to these suppliers whenever possible. Multi-source key supply chains to allow for instability and business change.
COVID-19 is going to continue to disrupt supply chains for the foreseeable future, so it is important to have a plan in place now. As businesses close and industries suffer across the world, others will rise from the ashes and innovate in ways we never thought possible. A lot of that innovation is dependent on procurement and supply chain leaders to stand tall, embrace the spotlight and help their organizations shine during these dark times.