Introduction: The only certainty is that there is no certainty
At this writing, it is impossible for anyone to predict the full extent of the COVID-19 pandemic, or its full impact on businesses — and certainly not on individual supply chains. This will cause severe, sustained disruption across all business sectors, upending supply chains and smothering demand.
In the long term, companies must become adept at managing risk to maintain competitive advantage, even in uncertain times. Implementing an agile, digitally enabled supply chain that deftly responds to changing market conditions is needed to future-proof your operations.
But in the short term — right now — you’re out of time. This is the moment to take decisive action, not wait it out. Now is the time to solidify alternate supply sources, distributors and logistics partners who can help navigate the disruptions along the way.
COVID 19 is not the only disruptor
While the COVID-19 outbreak may be the catalyst, the critical consideration for companies is how to deal with a business slowdown, coupled with ever-increasing supply chain volatility. With China’s growth engine “miracle” slowing (and possibly stopping), financial markets declining, the Russian-Saudi oil price war, Brexit and political uncertainty in Europe, as well as ongoing trade disputes such as those between the United States and China, there are a number of challenges to overcome.
For most companies, it means top-line growth will likely flatline or be significantly diminished. Capital expenditures and investments will be immensely scrutinized. For example, long-term programs such as three-year digital transformations, may be stalled or pulled back. At the same time, board members and activist investors will likely become more aggressive, with management teams feeling increasingly pressured.
The time to take action is right now
Disruptions to supply chains are not new, and previous recessions have had very inconsistent, uneven recoveries. But there is a way to minimize the impact on the bottom line — if you act now. In a very real sense, by actively seeking greater efficiencies within the supply chain, you are creating an opportunity to drive truly sustainable cost reductions for long-term competitive advantage.
So, where do you start? We have identified three actions you can take right now to mitigate the existing and imminent risks to your supply chain. Performing these actions now will mean rapid cost takeout and greater security of supply in as little as three months and on into the foreseeable future.
ACTION 1: SECURE CASH FLOW TO GAIN FLEXIBILITY
In times of trouble, cash is king. Start by harmonizing and lengthening payment terms globally — where not restricted due to local regulations — on all nonessential items. Avoid doing this with essential suppliers; you may need to accelerate payments to access critical supply.
Additionally, review inventory levels and look for optimization opportunities by adjusting reorder points, stock levels of critical spare parts, and so on. At the same time, build a cash buffer. This is an opportunity to cut direct and indirect structural costs by locking down favorable terms in categories with excess capacity.
ACTION 2; RENEGOTIATE THIRD PARTY COSTS IN AN ACCELERATED PROGRAM
Making cost reductions is paramount. Purchased costs and supply chain costs are typically 50¬–80% of a company’s cost structure. However, it is possible to realize sustainable supplier cost reductions quickly, even in situations where volume declines allow suppliers to claw back price reductions.
Also, by managing noncritical procurement spend, it’s possible to transform fixed costs to variable costs, thereby reducing overall costs even more.
With targeted, realistic sourcing of key spend categories — particularly those that can underpin ongoing operations — it’s easier to gain greater control of spend. Consider investing in modular supply chain technology that can easily link spend to contracted pricing without cumbersome ERP system usage, unlock one-time cash infusions, and prevent inefficiencies from sinking profitability further.
ACTION 3: ENSURE THAT SECURE ACCESS TO SUPPLY — NOT PRICE — IS THE TOP PRIORITY
The pending business slowdown creates further supply chain complications. To help ensure a secure supply chain, perform a risk assessment by identifying the Tier 1 and Tier 2 suppliers that are critical to business continuity and exposure. From there, streamline the new supplier qualification process to achieve faster onboarding of new suppliers. Also, consider longer-term agreements and partnerships with critical suppliers to help mitigate risks and ensure the security of supply, especially where there are no alternative sources.
A key question to ask: “What protocols can be implemented now to minimize the impact?” The answer isn’t moving production elsewhere. Instead, put together a disaster toolkit consisting of clear policies, communications, safety procedures, and guidelines for production and fulfillment. The goal is to help ensure business continuity and prevent painful headcount reductions due to lack of planning.
Budget-to-Pay technology, for example, helps maintain sustainable cost management by providing true visibility of third-party costs. With links to financial books of record, it provides insights into where to spend, and where not to, enabling finance and procurement to work in lockstep and to efficiently monitor costs
THE STORM WILL PASS
Business cycles are hard to predict and it’s impossible to know the future. While we like to believe otherwise, businesses are reactive. Today’s environment is no different — the immediate focus, by necessity, is on addressing short-term challenges. In this volatile environment, having real supply chain resilience and agility will be essential. It will be the difference between the leaders and the laggards.
1. Sponsor short-term improvements with the full support of the C-suite
2. Set up a fully dedicated working group to explore, evaluate and act on supply chain technologies
3. Align a common execution strategy with equal roles from procurement, finance, and information technology