It is time for all procurement managers to reinvent themselves and adjust to the "New Normal". Global confinement has created disruptions in both supply and demand for goods and services. Full recovery will take some time, but it is time for companies to take a closer look at their Supply Chain, with the vulnerabilities that have now been exposed in this Pandemic.
In this article we will answer the following questions:
- Why would companies be willing to pay additional values to ensure continuous and uninterrupted supply?
- How will supplier diversification become a top priority?
- Why will supply risk from now on be as critical (if not more so) than financial risk?
1. The main disruption is yet to come
The Supply Chain will change dramatically, so companies will need to should be prepared to implement a plan to minimize disruption in the future. As a result of the Global Pandemic, we have seen how some basic supplies are in over-demand, especially those related to PPE and medical supplies.
Covid-19 has dramatically impacted industries such as food, restaurants, airlines, travel, tourism and small businesses. However, the disruption of food and mass consumer products is expected to be short and smaller in scale, while international manufacturing tends to be replaced by local products for shorter supply times with simpler supply chains.
Most of the disruption will happen in the most complex Supply Chains. involving multiple steps that leverage sub-components from other geographies. Manufacturing disruptions that rely on Chinese components are so far starting to feel their shortages and the worst is yet to come. The most critical part of Supply Chains that is dependent on multiple geographies and multiple steps to complement the Chain is expected to arrive in 2 to 5 months from now.
Reliable Supply is the New Price to be approved.
Both Buyers and Suppliers, need to speed up their procurement processes considerably once the Pandemic begins to recede and a "New Normal" begins to take shape, which will be reflected first and foremost in trade discussions. Sourcing decisions will gradually be based on the selection of those suppliers with the highest level of redundancy in their supply chains.
Companies will be willing to pay higher values to add resilience in their Supply Chains, Therefore, decisions based on price alone will be secondary for many critical elements considered as strategic within the Kraljic matrix. There will undoubtedly be a re-evaluation of product distribution within global buyer-supplier relationships.
3. Acceleration of Supply Chains (Non-China Based)
Large and medium-sized companies will now have to take a deeper look at their understanding of the impact of the crisis in real time. More will inexorably come Machine Learning and Artificial Intelligence, applied to the Procurement to reduce risks. China has long been the destination of choice for many companies due to its economies of scale in manufacturing.China's economic growth, historical competitive advantages in cost and state development policies. However, recent decades have witnessed trends towards diversification, which adds redundancy to suppliers located outside China.
In the last 3 years this trend has accelerated due to growing concerns about intellectual property, tariff instability, shortened product cycles and natural disasters. COVID-19 will impact the Supply Chain by rapidly accelerating this trend towards diversification of new suppliers.. The concentration of sourcing exclusively from China will not be acceptable from a risk point of view for large corporations, as the financial impact is significant in the global market.
Plan for Disruption
Historically, supply chains have been designed for optimal performance under standard operating conditions. However, the number of disruptive events -natural disasters, national shutdowns, price fluctuations in commodity prices, etc.- is increasing. commodities and tax changes, to name just a few, have increased significantly in recent years. Disruption" is the New Normal. The pandemic will be the tip of the iceberg of what's to come. Companies need to start designing their Supply Chains with new priorities:
Priority 1: Supply Chain Certainty under adverse conditions.
Priority 2: Efficiency under standard operating conditions.
5.The risk of supplying goods and services is the new "financial risk".
After the 2008 financial crisis, companies focused their efforts on characterizing and monitoring financial risks within and outside the organization, with their business partners (customers and suppliers). There was an explosion of technologies and services to address this market need. "Supplier Risk" will be analogous to "Financial Risk" after the COVID-19 crisis. After the crisis subsides, boards and shareholders will demand that organizations adopt more proactive measures to manage and manage supply risk.
Key questions for organizations:
1.How do the contracts that serve the Supply Chain adapt to the "New Normal"?
2. How much resilient are your suppliers and its contractors within the sourcing ecosystem?
3. Are the suppliers innovating enough to meet demand (while lowering their operational risks), preparing for post-Pandemic?
4. Is your Supply Chain based on outdated software or an outdated flexible software that adapts to this "New Normal".What is the financial impact of this?
5. How much transparent is the Supply Chain?
6.Are there any signs of risk before being able to materialize them?
7. Does the company have a plan for risk mitigation within the Supply Chain that is easy and quick to implement?
8. How the COVID-19 crisis will impact the entire company?
9. What can learning the Organization from this crisis to improve the operational process without disruption?
Article Based on GEP publications.
