Add value with procurement optimization during the COVID-19 outbreak
These are unprecedented times for the phrase ‘unprecedented’ times. While this is the cliché of choice for newscasters and commentators, it pretty much sums it up. Previous pandemics may have amassed a considerable death toll, but without the global economic impact or the universal disruption to everyday life. Other financial crises may have left scars on the world’s economy, but without leaving a trail of death behind it. Without a doubt, COVID-19 will be felt for a long time to come, if we are all lucky enough to survive it. Unprecedented times.
Businesses are now all-consumed with trying to work out how to survive in this uncertain economic climate. How do they continue to trade? How can disruption be minimized on operations when employees are forced into social-distancing or self-isolation? How can businesses ensure supply chains are robust enough to cope? While the UK government has taken bold steps to support the economy with grants and rate cuts, one sure thing is that no one is escaping without some negative impact. The light at the end of this particular tunnel feels a long way off, and if this goes on for too long, could this be the final nail in the high street’s coffin?
It might sound counter-intuitive, but not all cost savings might be good cost savings. Now is the time to be saving money smarter. If the aim is to emerge stronger, businesses must be optimizing costs around the strategic agenda, keeping in mind key supply chains who are sharing economic pain. We accomplish this by getting to the core business, bringing commercial intelligence to decision making, and deciding: where to push, where to mitigate, where to invest, and where liquidity is at its most important.
Additionally, sales functions in dominant market positions should consider whether they should be seen to be exploiting the situation as well. It’s not just unethical at a time like this, but bad trading practice could force businesses into closure and push us all closer to a recession, if not depression. Now is the time for businesses to take a pragmatic approach and to support each other.
In fact, the “word of our times” for recovery should be ‘optimization’, specifically procurement optimization. Under normal circumstances, we optimize supplier costs, commercials, and relationships in pursuit of a set of objectives (sometimes cost, sometimes speed, resilience, etc.). But, right now, the goals have shifted from profitability to (in sequence) crisis, survival, reboot. With this in mind, organizations need to carefully judge how they act now and in the near future.
So what can be done to add a positive effect ?
The biggest challenge for most businesses right now is cash. Even those suppliers that continue to trade, may be doing so unaware if they will be paid in full or in part. For example, just this weekend, New Look announced that it would not be paying all suppliers. Not all suppliers will come out of this. Cash is key to survival, but it must be carefully managed up and down the chain.
UK grocery chain, Morrison’s, recently announced that they would be issuing immediate payments for their smaller goods-for-resale suppliers during the COVID-19 pandemic. This support is vital to keeping the flow of liquidity through its supply chain and also into the broader economy.
Large organizations should look to evaluate whether they, too, can help sustain their supply chain during the next few months by offering faster payment terms as this will have a disproportionate benefit during this crisis.
2. Contract management and service levels
Suppliers clearly need to continue delivering a service to their customers. Still, the environment we are working in right now doesn’t reflect the one that most businesses will have contracted in. Effective contract management is critical during normal times, but now more than ever. Are there safety considerations? Or, could benefits be unlocked for both parties, if rigid service levels are relaxed or amended for a short period? Working together in partnership with your suppliers could be key to offsetting costs on both sides and bring about a closer working relationship for the future.
Suppliers may also be able to factor this into wider considerations about how they manage their own fixed costs during this time. Open the dialogue and talk to suppliers and stakeholders.
3. Risk management: Preventing unintended consequences
Some businesses need to look very closely at their supply chain, i.e. beyond the obvious top 50, and understand what the impact will be if they don’t look out for other key suppliers. If too many collapse are we able to reboot when the time is right? Could we see the emergence of greater numbers of market monopolies? Will we be able to compete if we move from low-cost country sourcing? Could we find ourselves in a situation where limited opportunities actually end up costing more in the long run? Now would be a good time to thoroughly review your strategic risk and supplier management practices to ensure resilience and supply chain continuity is maintained.
4. Review insourcing: Make vs. buy, control vs. cost down
Over decades, the tendency to outsource has been widespread as businesses seek to optimize cost and, in many cases, speed and quality over internal control. Procurement optimization teams should now be thinking about how;
- Supply chain assurance is measured within the business case for change and whether the initial cost savings are genuinely worth the risk.
- If “out of sight” has meant out of mind, are we doing enough to develop our suppliers (things like efficiency, resilience, and automation), or have we just passed off the contractual risk?
5. Looking to the future of procurement optimization
No one has a crystal ball, but with any luck, the world looks forward to moving on from the impact, albeit slowly, over a number of months from now. Despite the obvious challenges in dealing with the current crisis, now would be a good time to start to challenge our old assumptions and planning for how to change things going forward. On top of the obvious things that mass working from home has taught us, like robust internal technologies supporting greater flexibility and agility in your workforce, do we still need the same physical footprint? Are fixed offices really necessary or just tradition? Is fixed headcount the right answer? Or fixed supply chains? Is your operating model up to the demands of the next global economy?
The world is changing. Can your procurement team benefit from transforming as much as our world has and if so, what better catalyst is there than this current crisis to stimulate that change? Get in touch to discuss procurement optimization further.