A Wake-up call for Supply Chain Managenemt

As procurement teams struggle to cope with the COVID-19 global pandemic, most have been trying to keep up with the news about global response measures and have been working diligently to secure raw materials and components and protect supply lines. However, vital information is often not available as a result, their response to the disruption has been reactive and uncoordinated. As the crisis hits the companies, they are helpless to combat and revive their operations to normal during the catastrophic times.

In contrast, a small minority of companies are good in mapping their supply networks before the pandemic emerged better prepared. They have better visibility into the structure of their supply chains. Instead of scrambling at the last minute, they have a lot of information at their fingertips within minutes of potential disruption. They know exactly which suppliers, sites, parts, and products are at risk, which allows them to put themselves first in line to secure constrained inventory and capacity at alternate sites.

Despite numerous supply-chain upheavals inflicted by disasters in the past decade — including the 2004 Tsunami, Kerala floods, and SARS and virological outbreaks— most companies still found themselves unprepared for the COVID-19 pandemic. Many were still in data collection and assessment mode, manually trying to identify which of their suppliers. There are several reasons for this problem — and potential solutions.

The procurement function is measured by cost savings, not revenue-assurance.

Most of the procurement’s activities are centered around cost savings, which means obtaining supplies at the lowest cost possible, provided they fall within specified quality parameters.

When the procurement function has to resort to extraordinary measures to secure supplies on time (e.g., by expediting shipments or purchasing parts or materials at a premium), the higher costs are assigned to other parts of the organization (the logistics function in the case of expedited shipments, and the finance function in the case in the case of premium prices for raw materials and parts). Often, no one asks: Why was expediting or paying a premium necessary in the first place?

People from procurement, logistics, and supply-chain financing need to come together to talk about what key gaps (tools, information, people, processes, etc.) need to be fixed to protect the company from disruptive events in the future and how to align the goals of procurement with the overall business objectives.

Supply chain disruption is often not part of supplier performance metrics.
When a disaster strikes, everyone suffers, buyers and suppliers alike. Therefore, it only makes sense that firms should incorporate disruption-related metrics in their evaluations of suppliers.

For example, when selecting a supplier and writing the initial contract, many leading companies include language that requires the supplier to participate annually in its supply-chain mapping efforts. When force majeure events like the current pandemic strike, those supply maps can be used as a roadmap to solutions to the crisis. 

After the COVID-19 crisis dissipates, we will see companies fall into one of two categories. There will be those that don’t do anything, hoping such a disruption won’t ever happen again. These companies will be taking a highly risky gamble. And there will be firms that heed the lessons of this crisis and make investments in mapping their supply networks so they do not have to operate blindly. when the next crisis strikes and rewrites their contracts so they can quickly figure out solutions when disruptions occur. These companies will be the winners in the long term.