The COVID-19 pandemic is driving many rapid changes in the business world, including within global and domestic supply chains. Companies have had to scramble to keep goods and services flowing, but now it is time to take the lessons learned and future-proof the supply chain for success in the coming post-pandemic world.
— By Betty Armstrong
Business analysts agree: The post-COVID-19 pandemic world is going to look very different than the pre-COVID-19 world. Businesses scrambled to keep supply chains performing as vulnerabilities in sourcing and production were exposed. This was exacerbated by the political issues that emerged concerning reliance on particular countries for essential items. Pandemic issues were further complicated by trade wars, shifting global manufacturing operations, and many unknowns about risks to health and safety due to transportation of the virus via various means.
In many countries, there is a push now to bring production home, reducing dependence on foreign suppliers for various essential goods and materials.
All of this adds up to major challenges in adapting supply chains to the permanently changed future of a post-pandemic world. Everything involving supply chains is impacted, from the amount of inventory held on a global basis, to the relationship of procurement to internal decision-makers and suppliers.
It is noteworthy that consumers never really understood the global supply chains carefully built over the last decade ... until suddenly in 2020 when a paper goods and technology shortage occurred, and critical items like pharmaceuticals were at risk of non-delivery.
When consumers internalize risks, the pressure on corporations to adapt rapidly and minimize these kinds of risks is intensified. During the pandemic, immediate short-term adjustments were made to supply chains, like converting to domestic manufacturing operations to produce goods experiencing shortages, and finding new suppliers closer to home. Some dynamics did not change.
Consumers watched prices increase during a time when many could ill-afford higher expenses and demanded better pricing practices. Companies had to develop ways to improve efficiency to keep costs down, to avoid unnecessary price increases due to shifting to domestic suppliers and to make other rapid changes. Some, but not all, were successful.
Now the world is moving into the post-pandemic stage, albeit slowly due to the COVID-19 vaccine manufacturers’ struggles to produce an adequate amount on such a mammoth scale. The reality, though, is that soon we will return to a “new normal,” and procurement should take the lessons learned in 2020 and use them to develop supply chains with fewer vulnerabilities. It is not an easy goal to reach, however, because so many supply chains have deeply embedded risks.
The most glaring example is relying on a single global supplier for critical components or materials. If the supplier is in a country that contains most of the world’s supply of a particular resource – like rare metals used in batteries and hybrid cars – it is just not possible to shift to a new supplier at home or even in another country. Without access to critical resources needed for product production, the company would have to go through a complete product design.
Discovering Embedded Risks
Uncovering the embedded risks in supply chains should top the list of the procurement function’s plan to move to greater resiliency and adaptability. Identifying the critical components and materials needed to stay operational is a first step. However, it is then important to go deep into the supply chain layers to avoid an unexpected disruption in the future.
One of the lessons learned during the pandemic is that even a small supplier in the farthest corner of the world can cause a major disruption. It is also important to look at the whole supply chain in terms of the types of services provided, like warehousing and logistics vendors.
Willy Shih, a Robert and Jane Cizik Professor of Management Practice in Business Administration at Harvard Business School, recommends mapping the entire supply chain. He suggests this is done to categorize suppliers as low, medium and high risk by using metrics like the potential revenue impact of a lost source, the ability of a factory to recover from a disruption, and the availability of alternative suppliers. Procurement can take the information to decision-makers in other functions to develop a path of supplier diversification, revise inventory plans, and manage costs in relation to pricing. At the same time, diversifying the supply base does not mean simply adding more suppliers. Diversifying the supply base refers to developing more sources in more locations that have different risks. The “China plus one” strategy is a good example of such a strategy.
Developing long-term supply chain resiliency is the key strategy for moving forward. Legal specialists at Baker McKenzie research found that in so many organizations, the global supply chain crisis is due to a lack of understanding and flexibility in the many layers of the chain. Historically, risk assessments have been applied mostly to top-tier suppliers, creating unrecognized vulnerabilities. Procurement now needs to collect data and information on the structure of the supply chain, identifying key contacts and suppliers along the full length of the chain to identify risks needing attention.
The cost of risk management processes can be offset by savings generated from making more informed decisions around things like product pricing (which can shift demand for particular products). It can also influence inventory purchasing and production locations. Purchasing must have deep knowledge of suppliers across the supplier chain in order to work with internal organizational decision-makers effectively.
One of the lessons learned during the pandemic is that even a small supplier in the farthest corner of the world can cause a major disruption.
Procurement’s Expanding Role
Procurement’s role is expanding due to the pandemic’s impact on the supply chain. It is no longer a matter of just sourcing and procuring goods and services.
The procurement professional’s role includes long-term strategic planning for supply chains that can experience sudden disruptions in a dynamic business environment. The procurement executive must be able to work internally to identify current and long-term needs, and they need to have a deep understanding of the function’s influence on general operations.
Ultimately, the goal is to develop a supply chain that can quickly re-mobilize to ensure the continued flow of goods and services. For many years, procurement functions have been building supplier relationship management (SRM) programs for purposes of efficiency, innovation, and cost control. Now SRM has become a core strategy for remaining competitive in the post-pandemic world.