How is COVID-19 affecting procurement?
COVID-19 has severely disrupted supply chains on a global scale. Business executives, and especially procurement leaders, are having to maintain business operations, fulfill urgent demands, and mitigate supplier challenges against a backdrop of significant disruption to their teams, their people and their local communities.
Procurement leaders have concentrated their initial efforts on managing upstream supply disruptions from tier 1 and tier 2 suppliers, while rebalancing short-term sourcing decisions in the light of supply network constraints. Now they need to turn their attention to the medium-term security of the supply base, unlocking funds intelligently and building future-proof resilience. This approach will not only help manage the immediate COVID-19 emergency, but also build stronger and more resilient businesses ready to thrive as economies return to growth.
Procurement has had to evolve rapidly in the short time since the pandemic began. It has been forced to become more connected with its ecosystem of suppliers, external partners, and internal customers. A major cultural shift in communication and ways of working is also underway, challenging traditional views about how procurement executes common source-to-pay activities and governance practices. Successful organizations are using this time to maximize both internal and external impact, showcasing an unwavering commitment to collective well-being. In the face of all this change, procurement leaders need to:
- Check in regularly on the physical, mental, and emotional health of the core and extended workforce, especially those in vulnerable communities where “gig working” predominates.
- Mobilize support structures for employees, while providing suppliers and extended networks with similar access to resources to safeguard ecosystem resilience.
- Reshape ways of working including maximizing investments in digital procurement technologies such as supplier collaboration tools, remote site-visit wheeled-robots, etc.
- Repurpose and reskill tactical sourcing workers to collaborate with all stakeholder groups in the design of new remediation, product development, service level, and fulfillment models.
COVID-19 has taught some procurement executives hard lessons about the viability of their business continuity plans. One found that dual sourcing efforts to reduce reliance on one supplier failed to consider the possibility of disruption across multiple geographies. Another client discovered that their organization’s contingency plans were too small in scale: they simply weren’t designed for a multi-country failure scenario. And many companies’ smaller and midsize suppliers, which are highly dependent on cash flow, have struggled with digital connectivity, teetered on the edge of bankruptcy or shut down completely.
Procurement leaders need to play a central role in shoring up and strengthening their companies’ supply base to:
- Scan and engage with tier 1 and tier 2 suppliers to understand the risks. Work together to remediate pitfalls, backlogs and liquidity challenges.
- Automate, expand and retrofit the risk framework, as necessary.
- Identify alternative sources of supply. Consider shifts to local suppliers where operationally feasible and socially viable.
- Build financial and social safety nets for struggling partners through shared success programs and creative engagement.
Revenue is slowing and demand in many areas is likely to remain depressed, even after the worst of the crisis has passed. Most companies will face a severe cash crunch for the foreseeable future. Preserving cash responsibly will therefore be one of Procurement’s primary goals for the next 12 months. To support this, they could consider how to:
- Optimize working capital and liquidity, while digitizing prioritized interactions with suppliers (such as invoice and payment processing).
- Embrace a zero-based mindset in managing all categories of third-party spend, starting with discretionary spend.
- Maximize employee productivity by augmenting capacity with advanced automation and applied intelligence.
- Control and monitor results through effective partnerships with finance and technology functions.
COVID-19 caught many companies unprepared. It has exposed shortcomings in their mechanisms to plan for and mitigate supply fluxes linked to natural disasters, infectious diseases and other severe disruptions. It has also revealed a lack of centralized and coordinated visibility in risk monitoring.
To increase their organizations’ abilities to respond to future challenges with confidence and insight, procurement teams can take actions to:
- Embed risk management into procurement decisions, all the way from upfront sourcing through to payment execution.
- Augment tools to enhance centralized visibility and controls, expanding coverage and mitigation execution from inherent risk to residual risk.
- Run scenario modeling and “what if” analyses more frequently, with the support of applied intelligence, third-party data feeds and predictive analytics.
- Hedge projected demand slumps and commodity price volatility.
Innovation is even more critical during a crisis like this. But innovation needs a purpose to be effective. Procurement leaders will have to consider how to use digital levers to reshape and redirect their innovation efforts, both for now and for the post-crisis world.
These efforts need to reflect the ways COVID-19 has affected companies and people deeply, changing or intensifying what’s important to them. For example, trends prior to COVID-19 were already showing a shift in consumer attitudes towards support for the greater good:
Procurement leaders should thus direct their innovation efforts at building trust and securing their companies’ license to grow to:
- Help review and update the organization’s sense of purpose, being thoughtful about customer-centricity and its role in corporate social responsibility.
- Be pragmatic and transparent, adopting a stakeholder lens in reviewing key decisions and opportunities.
- Revisit the savings distribution model, rebalancing how much is reallocated to the business and its people, how much goes directly to shareholders and how much is reinvested in society and local economies.
- Drive radical transparency and traceability through ethical sourcing practices and data democratization with all stakeholders.
Coronavirus, procurement & the future
The COVID-19 pandemic has stretched even the very best procurement leaders. Never have they been asked to play such a leading role in safeguarding their company’s financial viability and protecting a severely disrupted supply base, all while pivoting to a fundamentally different way of working. As they navigate the present supply-side storm and plot a course for reshaping their organizations for the post-crisis world, procurement leaders should keep three things in mind: