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 remains out of sight. The total costs, in terms of human lives, disrupted supply chains, ruined businesses and GDP impact, are still just projections in the array of charts presented daily by statisticians and data modelers.
There are, however, already some clear lessons to be learned by 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.
Balance Procurement Objectives
Before diving into specifics, I feel it is important to note how the crisis has emphasized 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 is uncertain, cash is once again king and Procurement and AP leaders are being asked to forecast and preserve cash wherever possible. And to maximize 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 far better position to achieve these objectives. A recent Forrester study on effective Procurement performance measurement found that advanced Procurement organizations measured and assessed performance based on many more, and more strategic objectives than less mature organizations. For example, 46% of advanced Procurement departments had bonuses tied to KPIs on supplier risk performance and supply chain disruptions, versus a third of less mature organizations.
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, processes and technology. That can’t be established overnight.
Companies that maintained zero-sum, hard negotiation relationships with suppliers cannot suddenly reset those in a more collaborative mold. Those that selected more rigid technology that is good at driving standard process efficiencies but less so in 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 supplier risk management. In a financial portfolio, it is quite possible to have 2 higher risk investments that deliver lower overall portfolio risk than 2 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 on-shoring or near-shoring, despite much discussion about these as better approaches.