The Covid-19 crisis shifted procurement priorities significantly, with ensuring supply continuity/visibility topping the list for many organisations. As a result, leaders have been rethinking their overall supply and supplier strategies.
Popular approaches for many organisations in recent years, such as China-first, lean or Just In Time inventory, revealed their vulnerabilities and are now being reevaluated. The focus is generally shifting from efficiency and cost to resilience and agility. Customer expectations and government policies on issues such as sustainability, forced labour and diversity are also contributing to this rethink. While there is no single approach that optimises for all objectives, there are four core principles leaders should consider.
1. Manage categories like financial portfolios
Supplier risk management often focuses on evaluating the risk level of each supplier and selecting lower-risk options when possible. Adding a category view is important, but often is limited to ensuring alternate sources are available. Optimisation requires taking that a step further, borrowing from a core strategy of investment portfolio managers – diversification.
A lower risk, less volatile investment portfolio does not necessarily involve low-risk investments, but ones that have diverse risk profiles. For example, a portfolio of three low-risk securities that are all exposed to interest rate risk can be riskier and more volatile than one of 3 securities each with greater but distinct risks.
The same applies to suppliers. A knee jerk reaction I have heard discussed from the initial Covid shock was to shift supply from China to local markets. That won’t necessarily reduce risk, and would only have shifted the timing of disruption during the pandemic while increasing costs all along. For example, UK factories were forced to shut down in March during the pandemic while Honda factories in Wuhan were reopening. A China +1 strategy, now being considered by many organisations, would have ensured greater resilience at all stages while also supporting lower costs, as long as the +1 supplier has a distinct risk profile from the Chinese one.
2. Go deep
Although many organisations have reasonable visibility into their suppliers, a lack of visibility into Tier-2 and Tier-3 suppliers – where major exposure to disruption can occur – is almost universal. According to research by Dun & Bradstreet, 163 of the Fortune 1000 had one or more Tier-1 suppliers in and around the Wuhan, China’s coronavirus hot zone, but nearly all had one or more Tier-2 suppliers there. Few knew until they were impacted.
Whether a forced labour scandal or supply disruption comes from within an organisation, its direct suppliers or sub-tier is irrelevant. The impact on the brand and profitability is similar. To select the right suppliers and effectively manage risk, it is essential to map your sub-tier supplier risk exposure (see Figure 1, above). This must be considered to take an accurate portfolio view of your supply base and optimise decisions.
3. Implement a customer of choice initiative
Maximising value from suppliers is not simply a matter of selecting the right ones. Ensuring continuity of supply also requires having priority for supply when inventory is tight. Supplier-led innovation requires suppliers that are innovative and willing to share their best innovations with you.
Too few organisations truly practice making themselves a customer of choice. Launch a formal initiative to do so. While factors beyond your control, such as organisational size and brand, play an important role, there is
much you can do. A 2020 study by Forrester Consulting found that the #1 factor that increased supplier willingness to collaborate with and share innovations with a customer is visibility into and timeliness of payments.
4. Automate smartly
A study by Harvard Business Review found that 70% of the companies surveyed immediately after the Covid-19 outbreak in China were manually collecting and assessing data about their suppliers – much of it in the form of anecdotes from personal conversations. This is clearly not scalable, nor timely. Enter automation. This is even more important as organisations shift towards expanding the supply base to ensure greater resilience.
SRPM and broader source-to-pay digitisation are essential here. To free capacity from manual activities to spend analysing. To seamlessly pull data from internal sources, suppliers and third parties. To provide access to actionable insights when and where they are needed. And more.
Yet solutions need to be smart, improving data quality and making it easy for users to leverage it. Technical-sounding details like a unified data model mean the difference between one supplier record linked to all activity and information, including sub-tiers, or multiple records that further silo information and frustrate users.
Different organisations naturally have different priorities when it comes to managing their supply chains and supplier relationships. Their specific strategies will naturally vary as well. But applying the above principles will serve organisations well, today and tomorrow.
Procurement Leaders is proud to have Ivalua as partners for the Innovation To Fuel Growth research stream. Alex Saric is Ivalua’s CMO.