Covid-19: How procurement functions can help businesses survive & thrive
Covid-19: How procurement functions can help businesses survive and thrive
The COVID-19 pandemic has forced businesses to take action that is redefining the way we work. To survive and then thrive, companies must deal with a multitude of short- and medium-term threats, while honing the operational agility necessary to exploit any opportunities that could deliver competitive advantage. For almost every business, the immediate priority is simply survival.
Procurement functions have always been at the heart of operations, managing complex supplier relationships and driving efficiencies. Now more than ever, their expertise is central to maintaining business momentum. In the short-term, procurement focus will be on keeping inbound supply chains functional, but as we emerge from the crisis and progress through the various stages of recovery, companies will need to adopt a more innovative and strategic approach. During this period, smarter, more agile procurement teams have a big opportunity to move their companies ahead of the curve.
Evaluating the downturn
With global business almost at a standstill, hundreds of thousands of people in lockdown or self-isolation, and no clear picture yet of an exit plan to some kind of normality, analysts are currently unable to accurately predict the macro-economic impact of the pandemic. What we do know is the Eurozone’s Purchasing Managers Index dropped to 31.4 in March from 51.6 in February – it’s one of the highest-regarded metrics of EU economic activity and any figure below 50 indicates an economic slowdown.
Despite this being the lowest point in the history of the index, we are still in downturn, and in the UK, the Office for Budget Responsibility has warned that by June, the economy could contract by up to 35%. The longer demand is restricted, the deeper the drop and the less likely a quick, ‘V’-shaped economic rebound. This huge fall in global demand is currently reverberating down supply chains; first manufacturers stopped production, then their suppliers were hit, and now a huge range of support services are being impacted as upstream business dries up.
Getting fit for the future
At some point in the future, restrictions will be relaxed, demand will return, and the wheels of commerce will begin turning again. Initially there will probably be a sharp rebound as suppressed demand impacts on the market – but past experience tells us that this is unlikely to be sustainable; the economy took five years to return to its previous level after the 2008 financial crisis and the impact of the COVID-19 pandemic is much broader.
So what will the recovery look like this time? How long will it take and how fast will the economy improve? In graphical representation, some have suggested the upturn may take the form of a ‘?’ shape, others a ‘U’ shape, and some even an ‘L’ shape followed by a gentle upturn. But at the moment there are too many factors to account for – and even more imponderables – to provide an accurate forecast.
However, it is clear that on a micro-level any recovery promises to be far from smooth. With supply chains severely disrupted, low goods inventories across the board, difficulties in securing credit and many companies having gone out of business, there will be huge challenges to overcome. And these challenges will be seriously compounded when the government winds-up its business support programmes, leaving already struggling companies to fend for themselves.
The way that procurement functions navigate this road to recovery will have a big impact on whether their companies are fit to face the future. In the next section, we examine how procurement teams can tackle the various phases of recovery, and take the opportunity to adjust their cost base, reposition their supply chains and add future value to the bottom line.
Phase 1: Keeping the lights on
In the current precarious environment, the focus for procurement teams is to help keep the business operational. With supply chains closing down the priority is not negotiation on cost, but guaranteeing availability and supply continuity to ensure that the business has the materials it needs to keep trading.
Procurement teams need to collaborate with existing suppliers to help them manage demand, and they need to recognise which party has market power in order to balance relationships. Buyers will also want to find alternative sources of supply and accelerate the on-boarding process of new providers beyond the normal approval processes.
One of the main challenges in this phase is likely to be securing and managing credit terms. Throughout the supply chain, every party will be holding cash as they try to reduce risk and financial exposure. For buyers this will mean having to deal with pro-forma invoices and compressed payment terms just to ensure goods are released.
In businesses that are downshifting or idling, procurement must focus on managing supplier contracts and relationships to ensure that any fixed or recurring costs are terminated or at least minimised. Hard negotiation, withholding of payments and the use of force majeure will become more common as the operating environment becomes increasingly challenging.
Phase 2: Managing the Rebound
As restrictions lift, there will be a rebound in demand, although volumes will be difficult to predict and procurement teams will have to overcome the challenges of price and availability volatility. In general terms, the nature and extent of this rebound is uncertain and it is likely to vary by sector – for example, demand for travel will probably be lower in the short-term.
With the restart of top-tier manufacturing, procurement teams at every level of the supply chain will need to become more agile in order to manage issues such as limitations on raw material supply, problematic logistics, credit restrictions and supplier insolvencies. The ability to find alternative sources of supply and blend volumes from different suppliers will be key – for example re-starting supply from Far Eastern sources alongside domestic or near-shore suppliers.
At the same time, procurement functions will also need to carefully protect their critical suppliers. Procurement will need to work closely and collaboratively with suppliers where there are no alternatives, and ‘recovery partnerships’ will develop as buyers and suppliers acknowledge their mutual dependency and work alongside each other to rebuild. As well as ensuring the procurement provision for business-as-usual, the best performing organisations will make sure this is supported by capacity for engineering, supplier assurance and quality approval systems.
In addition to managing these challenges, procurement should also take responsibility for lowering the business cost base, driving down pricing where possible, while finding new suppliers with stock oversupply serving sectors that are slower to recover.
When government support mechanisms are withdrawn, suppliers without access to supportive banks or adequate working capital are likely to struggle, so it’s important that buyers have a good knowledge of their critical suppliers. At this stage in the recovery process, it is important for buyers to develop a financial shrewdness that will enable them to find innovative ways of freeing-up supply in a credit-restricted world. For cash-rich buyers, credit terms may be the most powerful bargaining chip.
Phase 3: Lowering the cost base
As stability returns, procurement should focus on reducing the business cost base to align with lower volumes and provide the profitability from which businesses can demonstrate performance, fund recovery and ignite growth. In a hyper-competitive post-recovery supply market, top performing procurement teams will leverage market conditions to cut cost. However, a likely increase in M&A activity as weaker suppliers are acquired by cash-rich competitors, and the return of Private Equity into the market will add further complexity for buyers.
At this time, strategic sourcing will become the core procurement process, and those that gain the most advantage will be preparing for high-levels of sourcing velocity, competitive tendering and eAuctions.
Phase 4: Repositioning supply chains
When the economic environment is genuinely stable, procurement functions must champion a repositioning of the supply base to align with the new conditions and set the business on course for profitability and sustainability. With stability and assurance high on the corporate agenda, this stage of the process is likely to involve a significant de-risking of supply chains.
We should expect to see some reversal of the trend towards supply chain globalisation, with a shift towards near-shoring and domestic sourcing. There will also be a move from single-sourcing to dual-sourcing and multi-sourcing as standard procurement procedure. In addition, we may see an increase in vertical integration as buyers acquire suppliers to create more value and mitigate supply chain risk.
Phase 5: Risk management and the new business world
After organisations evaluate the lessons learned from the economic impact of the pandemic, we are likely to see the introduction of much stronger supply chain risk and supplier risk management procedures that provide buyers with greater control and complete transparency across the entire supply landscape.
It is also likely that procurement functions will need to adapt to new ways of working as businesses cut down on face-to-face meetings and unnecessary travel. Technology will become even more of a business enabler as procurement teams decentralise and buyers employ a raft of communication tools to stay close to their suppliers, with eTenders and eAuctions continuing to increase in popularity.
A shift to decentralisation and remote working supported by technology also provides procurement teams with the opportunity to locate their buyers closer to suppliers’ businesses so they are able to engage and collaborate without the need for extensive international travel.
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