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| Procurement in the Time of COVID-19 |
So, we have much of Europe in a lockdown, travel among major economic centers has been reduced to almost zero, and supply chains are being increasingly disrupted. This certainly must be the end of procurement as we know it. Procurement people can do nothing but hope for the best. Right? Wrong. In the COVID-19 pandemic, linear extrapolation does not apply.
It does not apply when projecting the number of confirmed infections. As all of us are learning now, the disease spreads at an exponential rate. It equally does not apply to the economy. While we have seen declines in orders and shipments, we should not extend this downward trend to zero.
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Consider China. After a nearly complete lockdown that lasted for several weeks, industrial production and shipping capacity is inching back to 60% to 80%. We don’t yet know how long lockdowns and travel restrictions will last in Europe and in America, but the current situation will not be permanent.
The empirical landscape from the 2003 SARS, 1968 H3N2, 1959 H2N2 and the 1918 Spanish Flu epidemics suggest a V-shaped recession as the most likely economic result of the COVID-19 pandemic. The V shape corresponds to intertemporal displacement of demand with growth overshoot on rebound. In other words, people who come out of the other end of this crisis will feel enormous relief and will indulge themselves to compensate for the endured hardship.
Suppliers are people too
Companies will be forced to ride down the first leg of the V and subsequently ride up the second leg of the V. In addition to protecting their teams, mastering these wild swings requires procurement leaders to achieve two near-term objectives:
- Ensure continuity of supply
- Leverage cost reduction potential
While the first objective is obvious, the second one may feel a bit counterintuitive at first glance. Cost reductions are of course welcome and will help retain the workforce and compete in a shrinking market. And the demand for cost reductions is also warranted. A lot of suppliers will benefit from lower input costs (e.g., oil price) and should pass them on.
For both near-term objectives, it is paramount to put suppliers at the center of considerations. Even in normal times, looking at the supply chain through the lens of somewhat abstract categories and commodities is shortsighted. In this crisis, it is even more important to have a strong relationship with the CEOs of your key suppliers.
Think about it, during a lockdown, the CEOs of your suppliers are sitting at home worrying about keeping their business afloat and preparing it to be ready for the rebound. There is no better time than now for reaching out. From CEO to CEO, place a phone call or send a text message to start a dialogue about the following questions:
- What is the best way for both our companies to ride out this storm, including measures to protect against financial difficulties?
- What can we as a customer do to help stabilize your sub-tier supply chain?
- What can you as a supplier do to make our products more competitive in a shrinking market?
- What can we do jointly to come out on top in the rebound?
In normal times, BCG recommends that CEOs nurture close relationships with the CEOs of their A-suppliers. In our definition, A-suppliers encompass those vendors that account for 50% of the company’s spend. Companies have 20 to 40 A‑suppliers on average. In this crisis, we suggest expanding this list to mission-critical B- and C-suppliers. It is not trivial to identify mission-critical suppliers in this crisis. As a rule of thumb, labor-intensive supplier factories are more exposed than asset-intensive factories.
If you are a carmaker, watch out what is happening at suppliers making wiring harness for example. Suppliers of steel should be comparatively cautious. By bringing in other board members to take care of supplier CEOs, the capacity to build strong relationships can be greatly enhanced. These relationships can prove to be extremely beneficial. When supply is constrained and the CEO of a supplier needs to make a judgement call, the customer with the highest mindshare will be favored. The same holds true for the readiness to benefit from the rebound. Those who invest now will be rewarded later on.
First and foremost, decency pays off. The CEOs of your suppliers are facing the same personal and professional challenges you are facing. Talking to them can provide you with a valuable sounding board and give you confidence in making the right decisions in testing times. A hard look at the way you do business If your company is in the enviable position of still having running factories, you probably had to prioritize. For some product lines, most of the material is available, so let’s mobilize everyone to get the remaining stuff as well. Most likely, you are making the products you can make and not necessarily the products you would prefer to make.
This leads us to two long-term objectives for procurement:
- De-risk the supply chain
- Simplify the product portfolio
The earthquakes, tsunamis, and floods of the past two decades that disrupted supply chains should have been a wake-up call. The looming trade war of the past couple of years should have been a wake-up call. Yet, as the COVID-19 pandemic shows in a cruel way, most supply chains lack even basic resilience and transparency. Too many companies rely on single-source suppliers as well as complex and long logistical networks. This may be great for short-term profit seeking, but it has proven to be too fragile too many times.
Going forward, companies will de-risk their supply chains. Single sourcing will be perceived as an unacceptable shortcut. Labor-intensive supply chains will be pressure tested against new waves of epidemics. Asset-intensive supply chains will be pressure tested against natural disasters. Global supply chains will be pressure tested against political risk. All supply chains will have to become more transparent, far beyond tier 1 suppliers and down to the sources of raw material. Some company boards will drive the de-risking of supply chains in a proactive way.
Some will be forced to do so by shareholders, others may be forced to do so by their governments. For example, having most active pharmaceutical ingredients come from a handful of Chinese factories might be perceived as a national security problem by some countries. Procurement will also be asked to scrutinize the product portfolios of companies. So far, this has been a one-way street. The mantra was to cover as many perceived customer segments with highly tailored products delivered by a lean supply chain. In the post-COVID-19 reality, the pendulum may swing the opposite way.
In summary, procurement will play a pivotal role in getting companies through the COVID-19 crisis. Those companies that together with their supply chain can ride down and up the legs of the V-shaped recession in the most agile way will emerge at the other end of this on top. Initiatives will vary between companies and stages of the crisis, but all will have the ultimate objective of gaining competitive advantage.
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The Author: Daniel Weise
About:
I am a procurement enthusiast and have the privilege to lead BCGs procurement business line globally. Supporting my clients globally and across industries, I focus on value delivery - beyond cost and including resilient supply chains and sustainability, operating model redesign and digitization programs.
I have also supported many of my clients in PMI and restructuring settings. Recently, I have published my first book summarizing my experiences in digitizing procurement functions: "Jumpstart to Digital Procurement". In BCG, I am also part of our global Operations Practice Area leadership team.
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