Supplier management — the need to implement at speed in times of crisis

As part of our steady supply of analysis, news and coverage on the effects of COVID-19 and the disruption to procurement activities, the world’s supply chains and business in general, Spend Matters has been garnering expert insight from procurement technology vendors to help firms with their navigation strategies or coping mechanisms.

We have amassed a whole spectrum of insight through our Coronavirus Response series to bring you a set of go-to places for specific guidance and advice during this time of crisis. One key area is supplier information and performance management (SXM). To that, we recently joined a webinar-based conversation with State of Flux, who, as experts in the field, are working with firms around the globe to help them build business resilience toward supplier risk exposure.

Ongoing State of Flux global research shows that the majority of organizations are typically in a position of significant supplier risk exposure, but a very large majority are exposed from a pandemic-triggered risk perspective. When non-typical risk such as this affects business continuity, it is by nature not one that we are sufficiently prepared for, therefore its consequences can be more severe. What makes this coronavirus crisis atypical is its rate of sudden impact and reach to all companies in all industries, everywhere. So, in adopting supplier management best practices in times of unprecedented crisis, speed is the most critical implementation factor.

Just prior to the webinar, Spend Matters Europe spoke with Alan Day, Chairman and Founder of State of Flux, who said:

“When you look past the human tragedy caused by COVID-19, the next big challenge is supply chain, and most specifically supplier management. Almost overnight we have supply chains and suppliers disrupted to an extent never seen before, and this has meant our level of supplier management needs to increase.

“You may believe your organization is good at supplier management, but our 11 years of annual global research in supply management shows that only 9% of organizations would be classed as leaders in this area. Because of COVID-19, we now have the focus and attention from the executives, so the time is now to implement or improve supplier management at speed.”

Seven essential areas of focus

The live webinar took a Q&A-style format between John Newton, State of Flux Product Management Director, and Mark Swyny, State of Flux’s third-party risk Executive Consultant with a background in financial services supply chain and procurement leadership roles.

John explained that in the most recent State of Flux global supply chain resilience study (2019), only 7% of organizations included “pandemic risk” as part of their risk management scenario planning. Meanwhile, 45% of responding organizations have effective risk management in place for up to 50% of their “critical” suppliers, but only 26% do the same for 75% to 100% of those suppliers. Interestingly, they expect these numbers to change significantly in the future as firms have realized the importance of factoring in this risk.

For firms that have traditionally focused on cost-reduction risk, it takes a major event, like a cyber attack, to change focus on supplier risk management and investment. “But even those firms that have made this transition, still have not factored in pandemic as a risk,” Mark said.

What is so different about this event, which no predecessor can prepare business for, is the scale and speed with which it has presented itself. State of Flux has identified seven key risk themes that have now come to the top of the risk management agenda:

  1. Health and availability of supplier workforce
  2. Financial viability of suppliers
  3. Organizational preparedness
  4. Social distancing requirements
  5. Skeletal supply chain operations (particularly port/airline closures)
  6. Physical product risk/contamination spread
  7. Demand shocks

Some of these are what we traditionally focus on like “financial viability of the supplier,” but others like “social distancing,” “risk of spreading the virus” and “demand shocks” are new risks.

“The challenge in this climate,” Mark said, “is to deal with all of them at once, as well as your typical recurring risk themes.”

In traditional business continuity planning, we can move from site A to site B if A fails, or from country A to B. But in a global risk situation this is not possible. So it raises the question — how extreme must your thinking be?

“I’d be surprised if any firm had thought about social distancing,” he said, “or prepared for whether staff can get into the office or how customer behaviors will change beyond a crisis. But the key thing to remember is that our suppliers are in the same boat. We need to find out how well they are prepared to flex and cope.”

Historic demands on the supplier have been negatively affected, like cost reductions, levels of stock, just-in-time manufacturing and logistics implications. We claim to have plenty of insight, but can we depend on its accuracy? We should really be considering approaching our suppliers for that intelligence.

“What it all comes back to,” Mark said, “is good supplier relationship management. For that you need strong lines of communication, collaboration and the right people in place who can manage it.”

On supplier financial viability, for example, the best way to understand it, given that a lot of financial account data is historic, is to have an honest conversation with the supplier, on cash flow, late payments and so on. A good indication can also come from social media sources — we’ve been hearing about customers being asked to take credit vouchers instead of refunds, for example.

Two work streams for rapid implementation

When implementing SRM at speed, State of Flux identifies two elements that are of equal importance:

  • Building for longevity
  • Rapid rollout and return for stakeholders

Building for longevity

At the moment, the spotlight is on procurement for answers. But lack of systems and processes are most likely exposed during times of crisis — just when they are needed most. Often the senior management response is “What do you mean you haven’t got …” Fortunately, it is much easier to articulate a business case proposition during a crisis, when the senior management response will more likely be “What do you need?” So now is the time to have those answers ready so you can prepare for the future. Undertaking a diagnostic now, and taking account of supplier input, will be invaluable.

The State of Flux SRM model has recently been refined to get firms rapidly from business case to identifying the right suppliers, but it has to be done with the long term in mind. It’s very important to understand which suppliers really support your critical business processes. While you may already have worked that out, this is not a one-and-done exercise — who would have classified a cleaning service as business-critical, for example? But now, cleaners are the people who will get your workforce safely and confidently back into the office. Effective segmentation is key in focusing on the right suppliers. There are many models, but what is mission-critical for some will not be for others — so it’s important to choose the right model for your industry and location.

Rapid rollout

It need not take a long time to deliver the business case. The key success factors have changed since we have put a COVID-19 perspective on them, and strong segmentation is one good value proposition.

Because there is an immediate demand for information from many people with many questions from many different parts of the business, the use of technology has become ever more important. For those industries operating in a “blame and claim” environment, now is not the time to be asking where the contract is located. How we respond, analyze and store responses to questions is paramount, especially since the CEO will want different insights from the COO, for example. If you are using Excel to do this, you have a lot of work to do. So in a business case, we must not ignore the value, and the cost, of technology.

As an absolute necessity for your business case, make sure your action plans are visible, understand the totality of your supply chain and think about the longer term and how you will operate in the “new normal.”

To hear audience questions such as whether Brexit planning has better prepared UK business for this crisis, what type of SRM model should I use, or which industries are proving to be most resilient, listen to the whole webinar here.

You can participate in the 12th annual supplier management research, and receive a free benchmark for your organization, here.

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