In the short term, managing disruptions is all that CPOs can do. As Mark Schneider, chief executive of Nestlé, told staff recently “Please get ready for the storm to hit — because hit, it will. We need to focus our efforts on securing supplies, manufacturing and logistics every step of the way. For those areas that are not affected yet, get prepared by building inventories of critical supplies and products.”
Soon people will go back to work, thanks to mass testing and vaccination. There will still be local outbreaks of COVID-19, which will disrupt supply chains, but these will become rarer and rarer. But what lasting effects will all this have on the CPO's agenda?
The ‘lean’ mindset has been prevalent in most procurement functions for a while now. Removing duplicate suppliers, standardizing parts to create volume leverage and reducing inventories have created the cost savings that boards and investors wanted to see. This has created great efficiencies and global sourcing has delivered good quality products for much lower cost to companies.
Asian supply chains for instance have been resilient even after crisis like the 2004 Tsunami in South East Asia.
Adapting to the new normal
The new normal is one where production can just halt in parts of the world. China's production went almost to a standstill in February; European and US production is doing the same in April.
This will be particularly bad for manufacturing clients for instance who have a single source of supplies for critical parts and limited strategic inventory to cover a real risk to their supply chain. Most CPOs are conscious of this but, until now, haven't tried or been able to convince their boards that the cost of building redundancies in the supply chain is justified. For certain categories and critical supply chain components, now is the time to re-assess this.
The challenge for CPOs will be to model and quantify the cost of the resilience and prioritize where to invest. Supply chain visibility will move from ‘how much do I spend with X’ to three key questions:
- Is X a single source in my category?
- How much of X turnover do I represent?
- Who are the key suppliers of X and where are they located?
Depending on the answers, CPOs will have to identify the following:
- How much would it cost to bring Y in addition to X in my supply chain?
- How much ‘strategic’ inventory do I need to keep for X parts and on what critical SKUs?
These answers could mean 5-10% extra cost on a critical supply chain and will need to be traded off versus the risk profile of the category (of which a starting definition can be ‘Were they still able to supply on time in full during the Covid 19 crisis?). CPOs will need to prepare robust business cases, to determine which to drop and for which to convince boards and investors that these extra costs are justified. There cannot be a blanket approach to this crisis and creating additional stock on non-critical components would be even more of a mistake when companies are short of cash.
Overall, it will elevate the discussions between the CPO, CFO and CEO and make supply chain resilience a regular top item on the board agenda.
There is no doubt 2020 will leave a lasting impact on what’s expected from procurement. CPOs should now look to source components in multiple places and from multiple suppliers. They should be prepared to pay more for backup options and to create larger inventories for critical parts. This will create supply chains that are slightly less efficient but far more robust for when the next crisis hits.