Coronavirus: How procurement teams can mitigate supply chain disruptions
COVID 19 or Coronavirus is proving to be among the most widespread outbreaks in recent times. While Wuhan, China, has been the epicenter of this outbreak, this deadly virus has affected multiple countries across the globe. A World Health Organisation report published on 21st March stated 292,142 cases had been detected globally. The United States of America is looking at 15219 confirmed cases.
The Coronavirus is wreaking havoc on individuals and organizations alike. As governments and health organizations strive to contain the effects of the virus, companies are struggling to manage and cope with the impact it has on their supply chain. Though empty racks at supermarkets are the primary cause of anxiety as individuals, the production shortage of raw materials and components is a cause of major concern for organizations dependant on China for sourcing raw materials or finished goods.
The Potential Impact
The Chinese economy according, to IMF, produced $25.3 trillion in 2018, calculated based on purchasing power parity. This made China the world’s largest economy. Followed by the European Union with $22 trillion and The United States at 20.5 trillion. The estimated value of imports from China to the USA stood at a staggering $557.9 billion against $179.3 imports in 2018. The predicted economic impact of this epidemic is unprecedented, second to only the 2008 recession.
This epidemiological threat has pushed governments and CDC to take measures like quarantines and imposing social distancing. This and the disease itself will make the availability of white and blue-collar employees an issue, which will impact the business.
Supply networks will be handicapped with the imposition of travel restrictions, moving and transporting materials will pose a major challenge even if the availability of goods is unaffected
Identifying new global sourcing avenues and programs might be a challenge owing to travel restrictions to certain areas.
This coupled with the fact that China has become the locus for manufacturing and export of everything from spices to auto parts, electrical machinery makes the country a major cog in the wheel.
Shortages of raw materials, components, and finished products are only going to get much worse, with many companies oblivious to the fact that they might be exposed to Chinese factories that have currently halted productions. While organizations are aware of the tier 1 suppliers they directly deal with, they remain unaware of their tier-2 and tier-3 suppliers.
The current situation is almost a Deja Vu of the situation Ford faced in the 2011 Thailand Floods; they had to shut production due to part supply shortage as the manufacturing company for these parts was in Thailand.
How can procurement brace for impact and help?
A survey of organizations in Casme, a global membership network for corporate procurement, showed that most participating companies responded in an affirmative and said, purchasing teams are “playing a vital role in managing the impact of the Covid-19 virus”.
2011 was a year that taught procurement leaders of multinational companies multiple valuable lessons about their supply chain. These teaching mainly revolved around the volatility of suppliers, be it the floods in Thailand or the Earthquake in Japan, multinational organizations were able to gauge the impact direct suppliers will have but were jolted by the shock caused by tier 2 and 3 suppliers.
1. Study your suppliers:
After Hurricane Maria, hospitals really struggled with sourcing plastic bags, it wasn’t the non-availability of blood, but the shortage of plastic bags to store it in that posed a challenge. Companies often closely track suppliers that provide expensive, primary components but fail to track the suppliers that provide inexpensive parts. Let’s say it takes 280 parts to build a car, and it would take the absence of only one of those parts to not build a car, wouldn’t it?
From suppliers that account for most of your business to the ones that account for a lower chunk, analyze and identify which of your suppliers comes from high-risk geographies. This will give you a better read of the situation.
2. Plan and Prepare:
Disruptions happen, and they’ll keep happening. We’ve seen multiple disruptions to believe in being proactive now. The key is to be as ready as possible to tackle disruptions. Set and monitor key risk indicators and “what-if” scenarios to get a perspective on how material or labor shortage, production capacity, consumer behavior, and natural calamities can impact your business.
3. Don’t put all your eggs in one basket:
Relying on one supplier for an integral part of your final product or any commodity is a mistake that has cost multiple companies their entire assembly line and stopped function in many cases. Despite knowing the risks of single sourcing, many sourcing and procurement teams still rely on a single supplier to meet savings or cost avoidance goals.
4. Review your approach to inventory:
Organizations that follow the “Just-In-Time” inventory management approach might be facing more trails in the current state of unrest. Right now, building inventory would help businesses continue for longer duration without having to halt operations due to port delays or raw material shortage.
5. Identify alternate sources of supply:
Continually work on identifying local suppliers to sources from. If the material you want to source is niche and local options are fewer, then try identifying alternate routes of transportation.
6. Work with your Suppliers:
Keep all channels of communication with your suppliers open. Procurement teams should work with suppliers to come up with risk management and contingency plan.
How can procurement technology help?
Technologies, including A.I. and BOTS, can help procurement leaders tackle the crisis at hand better. Here’s how:
- Supplier Information and risk management:
It is imperative now, more than ever, to identify consistently performing and reliable suppliers that you can depend on. A supplier management platform that records supplier information and performance across key indicators and gives you a unified view will aid visibility and decision making.
With physical distancing, it is vital that you are able to virtually connect and proceed with operations as usual. Invest in a tool that offers connectivity through phones and tablets so procurement teams can continue ordering the required components and procurement and sourcing managers can approve them without having to depend on an extensive set-up
- Identifying Savings Opportunities:
In a time where companies are already facing huge losses, this is the right time for finance and procurement leaders to invest in tools that show the user insightful analytics and aid savings by way of dynamic discounting and savings management.
- Focus on planning and risk mitigation instead of operational tasks:
Procurement and Finance leaders should focus on activities like contingency planning and risk mitigation. With optimal usage of A.I. and BOTS organizations can put tasks like Invoice Data Extraction, Contract risk identification etc. on auto-pilot so you have free bandwidth and resources to allocate to strategic tasks.