COVID-19 Will Change the Way Companies Approach Supply Chain Risk Management
By: Mike Fergus, Principal Consultant, CCL Integrated Supply Chain Solutions
With the current pandemic impacting many businesses on a global basis, procurement teams are being asked to assess resilience of their supply chain. Depending on the industry, some of these issues relate to supply meeting demand, as is the case with PPE and toilet paper. In other cases, it’s ensuring supply continuity given forced business closures and the financial difficulties that go along with these closures. Now is the time for businesses to evaluate the risks associated with their supply strategies.
In the past, pressure for low priced products have forced companies to source from a narrow supply base in a bid to improve margins. Although efficient in a stable environment, these single source relationships have no redundancy. In the climate of the COVID-19 crisis, supply chains are proving to be brittle. Now is the time for companies to diversify critical sources of supply to ensure sustainability.
How do you create a resilient supply chain? Begin by assessing the capabilities of your existing supply base. This will enable you to segment and identify the high-risk components that will require diversified sources of supply. The assessment should involve evaluating many attributes of the current relationship. These include supplier performance, financial structure, customer base, tooling and any IP ownership concerns. A good procurement professional will have an understanding of these intricacies and will know where they fit into the supplier’s priorities. Together these will define the level of risk. Components that are sole or single sourced with critical suppliers will need immediate attention.
Risk mitigation can take many forms. Partnering with these critical suppliers to coordinate solutions is key. Do they have redundancy built into their network? Can you qualify additional sources in their existing footprint? If there are concerns about the overall financial health of a supplier, you need to immediately identify an alternative source. Traditionally, companies would not have invested in building redundancy into their supply base because the business case didn’t make sense. Qualifying additional sources of supply requires investment in technical resources, additional tooling and can result in higher pricing, especially if the supplier exists in a different geographic region.
The COVID -19 crisis is forcing companies to reevaluate these priorities, resulting in greater focus on risk mitigation strategies. Geography will play a role in determining the location of 2nd sources and the category strategies should drive the decision process. From a human capital perspective, this will require additional technical resources to support supplier development programs. The knowledge of manufacturing processes and quality systems will be in high demand. Precious R&D and Engineering resources will need to be reallocated to support procurement strategies that have been designed to mitigate risk. Career paths may need reengineering and roles regraded if technical talent is to be attracted to support sourcing initiatives. Collaboration of Talent Acquisition and procurement leaders will be tasked with defining job specifications if external hiring is needed. Procurement organizations will be fundamentally different in the future as they lean heavily on technical support to broaden the supply base capabilities.
The resiliency of a company’s supply chain is under increased scrutiny. Supplier risk mitigation needs to be an active program endorsed at the board level. Future procurement leaders will be front and center to deliver these strategies. Their voice and opinions will be actively sought in the boardroom as stakeholders look to guarantee business continuity.