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In ten years’ time, the procurement profession and the role of the Chief Procurement Officer (CPO) has changed in many unique and profound ways. Yet, just like 2010, CPOs and other procurement leaders are entering the new decade grappling with intense challenges (some old, some new) and driving forward to achieve aggressive goals and objectives.
On that front, I’m pleased to continue with our exciting, new series on CPO Rising – “20 for 2020” which examines a broad range of CPO-driven topics. Today we continue with 20 for 2020: Key Themes for the Modern CPO’s Agenda (#17 – Supply Chain Resilience), which is designed to help procurement set their organizations’ course for the critical months and years ahead. Enjoy!
20-for-2020: Theme #17 for the Modern CPO’s Agenda: Supply Chain Resilience
There’s nothing like a pandemic to highlight the essence and importance of supply chain resilience. Covid-19, the novel Coronavirus, has as of this writing spread to six continents, infected more than 125,000 people and killed more than 5,000 people (source: World Health Organization). The pandemic has exposed the precarious and comparatively untested strength of global supply chains (click here to read Ardent Partners’ recent research alert, Bad Moon Rising: Global Supply Chain Risk Reaches 20-Year High), and has underscored the need for more resilient supply chains. But what are resilient supply chains, exactly?
Merriam-Webster defines resilience as 1) the capability of a strained body to recover its size and shape after deformation caused especially by compressive stress, and 2) an ability to recover from or adjust easily to misfortune or change.
Together, and in their own right, these definitions encapsulate the qualities that many businesses, organizations, and frankly, people, need to possess in the time of Coronavirus, and any wide-scale, prolonged, and high-impact disruption of normalcy. Applied to supply chain, resilience ought to mean the capability of a company to recover or sustain the full capacity of its supply chain during a temporary or sustained business disruption or risk event. Indeed, as global supply chains continue to experience Covid-19-related disruption and uncertainty, let’s take a moment to consider what supply chain resilience looks like and how procurement and supply chain teams can work to build them.
Supply Chain Resilience
Inventory Optimization: Inventory optimization will vary greatly depending on industry, geography, and individual companies, so its significance is relative and specific to supply chain resilience. While not every organization needs to maintain large inventories of either direct or indirect goods and materials, those that do can arguably be considered more resilient during a supply chain disruption because they will have longer inventory run rates that will “float” them until supply chains are reestablished. Businesses that aren’t able to maintain high inventory levels would likely be less resilient and at greater risk, while those that purposefully maintain lower levels, rely on drop shipments, or just-in-time delivery may assess their risks differently in the event of a supply chain disruption. In short, inventory optimization’s impact on supply chain resilience can and will vary greatly; but it can be a major factor.
Supply Chain Intelligence: Having the capability to look across one’s supply chain, drill down into specific regions, markets, suppliers, and logistics partners, and then layer current events on top of this landscape can provide procurement and supply chain teams with the current intelligence they need to mitigate sudden risk events, or spot emerging risks on the literal horizon. Knowing that there are labor shortages in China, new tariffs in the US, and a pandemic plaguing the entire world can help inform decision making on whether to reorder or replenish inventories early (short term), diversify a company’s supplier base to increase their options (mid term), or source goods and services from a different market (longer term).
Multiple / Alternative Suppliers: With good supply chain intelligence, sourcing and procurement teams can better understand the risks associated with single sourcing materials, products, or services (e.g, when demand is high and supply is low), and make strategic decisions to diversify their supplier base. Awarding contracts to multiple suppliers and spreading spend across them (or even using one as a primary source with another or others as secondary sources) keeps suppliers in a company’s sourcing pipeline should one or more suppliers reach capacity, go bankrupt, or is in a prohibitively risk market or geography.
Supply Chain Optimization: This is a high-level, data-driven process by which CPOs and their teams examine supply chains for hidden opportunities to save more in the short and long-term and avoid/mitigate risk. Using optimization tools, sourcing and procurement teams can examine supply and demand in a given market or region for a particular commodity or category and make more cost-effective decisions. They can use the process and technology to mitigate supply risks, like a labor strike, price fluctuation, or natural disaster. In short, supply chain optimization allows sourcing and procurement teams to be agile and responsive to sudden market shifts and take advantage of them.
Flexible Contracts: Although moving from one market to another, or from one supplier to another can be an effective way to increase supply chain resilience and reduce or mitigate risk, there is financial risk associated with doing so. For example, there is the cost of terminating contracts early, or perhaps the risk of not purchasing enough volume to take advantage of discounts set forth in a given contract, or otherwise violating the contract terms and conditions. But “writing” flexibility into a company’s supplier contracts, such as having shorter durations, no-cost terminations, and force majeure clauses can provide procurement teams with some room to maneuver within their contracts while they source from other suppliers.
Final Thoughts
As the number of global and national Covid-19 cases and related deaths increase, businesses have yet to see the worst of this pandemic. Frankly, it’s going to get worse before it gets better. This is a time for resilience — in business as in life. Supply chain resilience boils down to agility — being responsive to sudden or emerging market conditions and moving quickly to avoid or mitigate the risks. There are a number of ways that companies can build resilient supply chains; these are five ways, and there are surely others. But a company can’t go wrong with these five, especially at a time of such business disruption, uncertainty, and risk.
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