What is the scope of the challenge procurement organizations are facing in high tech as a result of the COVID-19 pandemic?
The challenge of the COVID-19 pandemic is the unprecedented scope and scale of the impact zone. Past disruptions, such as factory fires, tsunami’s, earthquakes or even past pandemics, were relatively localized. A city, country or region of the world served as the epicenter. In those cases, supply chains could stand a chance of reacting by adjusting their supply chains to other suppliers or transportation lanes. In this case however, the problem is much more severe.
COVID-19, is more contagious, and it spread quickly. Not only were more supply chain team members directly affected, many others were asked to leave their offices or plants and to shelter at home. So not only a larger geographical part of the global supply chain, but almost anyone that participates in the process of bringing goods and services out to customers is affected.
Rarely, if ever, have global supply chains experienced an almost complete standstill. Procurement organizations have the challenge of reorganizing themselves, although distributed, and then attempting to work their suppliers, who themselves are out of position, adhering to stay-at-home orders, or dealing with COVID-19 themselves. So, this human element impacts almost every commodity area. We have not seen a disruption of this magnitude and scale before across every commodity area.
What are the weak links in global supply chains that COVID-19 has exposed?
Several weak links become apparent with COVID-19, but these newly exposed vulnerabilities need to be viewed in the context of the events we were dealing with before the virus began. Over the past year or so, U.S. supply chains were busily working with imposed tariffs. These tariffs caused supply chains to re-examine their supply lines, specifically those coming out of China, and to re-think those sub-elements. These companies, for example, had already begun thinking about either near-shoring or on-shoring more of their commodities, either in-whole or in-part. With COVID-19, this problem gets even worse, as long supply lines exacerbate the situation.
Let’s back up a little bit… all the way to the late 90’s. Then, the economics and politics became favorable to move a bulk of one’s manufacturing to Asia, specifically China. I saw this first-hand as a CPO of a leading telecom company.
First, there was the core manufacturing. We saw amazing savings – in the 30 – 40% range. After the dot-com bust, even more savings were needed. This prompted the push for “localization” of the rest of the supply chain, predominately at the discretion of the outsourced manufacturer. The concept was simple. Asian-based contract manufacturers chose local suppliers that could be applied across all their OEM customers. Aggregating sub-tier suppliers for the benefit of the contract manufacturer was a lot less expensive than having each of their customers choose and then manage their own supplier choice. This method of leveraging localized suppliers brought another tranche of exceptional cost savings. These savings allowed many companies to survive the recession of the early 2000’s, and then later in 2008, when economies also needed an extra cost cushion.
Later as new disruptive events unfolded, the weaknesses in these long supply chains began to emerge. Through staff cuts and cost-cutting measures, companies had lost visibility to what was happening below their tier 1 supplier. Supply chains had taken whatever shape they had taken through whatever processes propelled them – however disjointed and uncoordinated. Tsunami’s, volcanoes, earlier pandemics showed companies that they could not completely abdicate their supply decisions to someone else.
Conflict mineral legislation caused companies to have to understand well beyond their second and third layer into their sources of supply, and then be held officially accountable by filing certifications annually to the Securities and Exchange Commission. Recently, consumers and Corporate Board Members have increased pressure on operations teams to understand E.S.G. (Environmental, Sustainability and Governance) for material components. Multi-tier visibility is now serious business, and companies are finding themselves in the dark - lacking in information and understanding.
COVID-19, partly because of its scope of impact, partly and because of the magnitude of impact, flips the lights on and will signal a pivot point. Companies will have to re-evaluate everything from the ground up. The sea change will be as large as the one that caused the initial resourcing to Asia back in the early 2000’s.
Procurement organizations will have to alter their sourcing strategies for, among other things, new country of origin data. Risk teams will gain influence over these strategies and will be asked to have a seat at the table for New Product Introductions.
Sales teams will add Supply Chain Resiliency, Sustainability and Ethics to their traditional customer dialogues on product, price, quality and delivery. Companies will need to be much more deliberate about selection and visibility to their sub-tier suppliers. The line between a company’s own factories and suppliers several tiers down will blur to invisibility.
Sourcing Strategies will have to forever consider the standard of care that their providers offer to include risk mitigated supply continuity disciplines, their compliance to ethical and legal requirements, and even more detail on their sustainability and environmental practices. I believe this standard of care will transform into its own set of metrics upon which companies will compete for business.
What are the steps procurement organizations are taking today in high tech to deal with these problems? What is happening behind the curtains?
The immediate problem is paradoxical. Teams are working shortages of components for orders that need filling, and for open factories that still have demand. On the other hand, supply chain planners must think about an economic slowdown that would lower demand or even halt demand. These kinds of dual variables wreck havoc on Work in Process (WIP) inventories and deliveries. Yes, orders are orders, but if companies get in trouble, they may cancel or worse, return inventories they don’t need.
Good supplier management teams will focus their energies on making sure that their supply lines are optimized and anticipatory. Procurement leaders should be in touch with their supply bases and communicating their view of the world. Otherwise, suppliers will make their own decisions and judgments on how to best plan their businesses for their own sake.
Procurement organizations need to feel comfortable with communicating both what they know and what they think may happen next. To do this, they need to be in constant communication with their sales counterparts who also have a perspective on their demand and who also will want to hear from the supply chain on what can be delivered. Transparency during a crisis is paramount. Transparency builds trust.
The other really important area which we will begin to see soon, are the effects on suppliers’ financials. This is usually a rather hidden danger. Procurement folks are speaking to their supply base’s sales or delivery teams about incoming material. Meanwhile, the supplier’s CFO’s and CEO’s are worried about cash and making payroll. Many times, companies aren’t forthcoming with those difficulties until it’s too late. If not already started, supplier managers need to be working with their weaker suppliers to ensure they are in touch with their finances. Sometimes advance ordering or short payment terms may be necessary to keep a critical supplier afloat.
What have procurement organizations learned from COVID-19?
The lessons are still accruing. Supply chain visibility, down several tiers, is critical. In times of crisis, response times from suppliers on the precise status of orders become time-precious elements. Also, procurement organizations are painfully aware that supply chain risk governance and communication channel protocols must be established before an event occurs. Otherwise, supply leaders would be inundated with questions from bosses and sales teams, while they have more than a full time job working the answers with their teams and supply base. But these are the basics. Those that are behind, will feel the pain.
For the more advanced, I think that COVID-19 will also highlight a more prominent role that technology will play in managing the day-to-day. This has been the largest global disruption event in decades. For procurement team members in their 20’s and 30’s, this is their first major disruption where they are now on the front lines of the battle.
Establishing communication channels from home offices, which would have been arduous and complicated 10 years ago, is second nature to millennials and Gen X/Y’ers today. They don’t see technology as a hurdle. They see technology as something to quickly integrate and leverage. This might start with web-enabled conference calling but could quickly include supply chain management (SCM) focused AI technologies.
Optimized new sources of supply, filtered by country of origin, ranked by their relative cost, rolled up to their product BOM’s (Bills of Materials) and procured through on-line RFP tools… done with a few mouse clicks. The old generation of methods and tools – standard office phone calls to people inundated with work or working from home, emails and waiting for a personal response, Excel spreadsheets with supplier information that may be out of date, PowerPoint based sourcing strategies that reside on a commodity managers computer – will give way to new tools that provide speed and transparency.
All C-suites and Boards will be asking the same post-pandemic questions, “What did we learn, and what do we need to do differently?” Procurement teams should be collecting their respective experiences and preparing to provide answers. Better AI technology and SCM platform investments will be a large part of the follow-up.
Post COVID-19, how do you anticipate procurement organizations changing their strategies? What will they do differently to prevent some of the problems they are facing today?
I believe and teach that organizations need to adopt a “Risk Culture”. Having at least one empowered leader whose job it is, every day, to think about the supply chain’s risk exposure and to be constantly improving their risk mitigation strategies. This is not a natural way of thinking for most supply chains.
Historically, supply chains love to “dive and catch." Let the crisis happen and then be the hero that saves the day, albeit through extending extraordinary and sometimes expensive measures. Unfortunately, those mechanisms are typically too late and, many times, ineffective. And above that, customers expect more.
Ten years ago, as a CPO, I might have gotten away with telling a customer that I didn’t know where my sub-materials came from two tiers downstream, or who was the person on 3rd shift that I would call if there was a supply continuity issue. That doesn’t work any more.
At a minimum today we need a robust Supply Chain Risk Management program that includes Crisis Response team members that have been pre-identified and who have practiced their role on a regular basis using technology that gives them the information they need, from their laptops, in minutes.
After this, other more systemic issues will emerge. We have all become reliant on foreign countries for our critical goods and technologies. In the earlier years of outsourcing, this calculus was left to supply chain executives, their CFO’s and shareholders. If you can make it cheaper somewhere else, then by all means - do it! Then conflict mineral concerns demanded we understand the details around our precious metal foundries. Tariffs and recent legislation are now requiring specific homologation data or Country of Origin information.
The response to COVID-19 will certainly build on these themes. We have seen evidence of pharmaceuticals and life-savings drugs being released or not released by the originating country due to host-country politics. Now add to the list, masks, respirators, then other medical supplies that could, logically be needed for the next set of circumstances.
To be both cost competitive and compliant, technology suppliers must work together. If circuit board manufacturing moves away from China for some of their customers, those producers will attempt to make it advantageous for the rest of their customers, as well. Whether that means near-shoring to Mexico or returning back to the U.S., companies will seek a strategy that brings them scale. This means all the past work of resourcing supply chains when they first moved to Asia, will have to be re-thought from the beginning.
Much remains uncertain on exactly how that will happen or to know where this will land. Will the U.S. (or any) government offer incentives to bring manufacturing back home? If and when that happens, will the labor costs be the same as when companies could exploit cheap labor abroad or will they replace factory workers with robots when in higher cost locations? How will all of this affect finished goods costs and will the consumer pay for it?
The Sustainability and Ethical supply chain initiatives might also sway the pendulum, but how these forces balance out will be an interesting dynamic over the next year.
How might organizations change their supply chain and risk management strategies in the future?
We’ve discussed some changes earlier, but let’s now deal with the specifics of a procurement organization and what it all might mean. A typical benchmark for a high-tech procurement organization is measured as “operation expense applied to the spend that they support,” and it falls within a range from 0.5% to 1.0%. And for this range of expense, CFO’s expect a certain level of performance, typically measured as “cost savings”.
The ROI for a high-tech procurement organization is between 500% and 900% ROI. These benchmarks come with a certain expectation of where procurement teams spend their time. Obviously, they don’t spend every minute negotiating with suppliers. Some of their time is spent on other distractions like working a global pandemic! That effort doesn’t show up in the metrics.
What’s needed are more tools and processes that anticipate, automate and optimize these “distractions” and that provide economic leverage. Investment examples include no-touch tools that provide: Supply chain visibility that is mapped through multi-tiered suppliers and which yields instant status to automated event monitoring, and smart-phone to smart-phone links to precisely the right person, wherever they are on the planet for a response.
Access to component cost databases that can immediately recognize a price disconnect and execute an on-line RFP would be useful. In addition, integrated supplier selection and management tools that bring together risk, country of origin, sustainability, cyber, ethics and all other areas of interest that previously were done bespoke and decentralized.
Procurement team member productivity will become even more important. Procurement organizations have been trending toward high strategic value. Any leakage that takes these team members away from their most strategic tasks will come under scrutiny. Sending emails and waiting for answers doesn’t work anymore.
Many companies have supply chain risk management programs in place - were those programs sufficient?
When asked, most companies answer, “Yes!” But when they are compared to their peers, few are really best-in-class. Their deficiencies usually have to do with their inability to anticipate, communicate or act.
Most well-run supply chains will ask themselves, “Did we get this right? And if not, what was missing?” Procurement organizations may be tempted to start with their suppliers and how they either did or didn’t respond in a timely manner. I would suggest starting at the other end, with the Sales teams and their customers.
As a Procurement and Supply Chain team, were you able to supply your customer with both the products they wanted (on-time, quality, etc.) as well as informational updates that they needed on order status and deliver dates? If not, what information were you missing, and how could you do better next time?
Recently I asked a Sales Engineer how much of his time he spent speaking to his customers about various supply chain issues including earlier tariffs, and COVID-19 delivery challenges. He estimated the percentage had grown from 33% to over 60% of his time! I anticipate that supply base visibility and resiliency, suppliers’ eco-friendly programs, cyber-security practices, business continuity programs, country of origin detail and other operational compliance and risk management issues will be much more important to customers post-pandemic.
Supply chain executives along with their sales colleagues should ensure they are equipped with the right skill sets and tools to support these program requirements. Do they have a PPT on these topics ready-to-go? Have they benchmarked their capabilities against their competitors or against other suppliers to whom your customer may compare your answers? Have you placed someone in charge of this area who is “risk aware” and has a passion and the communication skills for this area? If not, customers may not say it, but they will leave your sales pitch thinking that you are ill-equipped to earn their post-pandemic business.
How might companies improve supply chain risk management programs in the future to avoid some of the issues being exposed today?
I have been working with companies in this area for the past decade and would estimate that only one hundred companies worldwide have the right level of commitment and are truly best-in-class. This pandemic, however, may increase organizations’ commitment levels.
One characteristic of a world-class program is how integrated these concepts are beyond the procurement and supply chain teams. For example, the toll gate in your new product development program should include input on inherent risk of the proposed Bill of Material. Have they developed a metric that accumulates a risk score for the proposed supply base? Who presents this data to the design teams? If a proposed bill of material or recipe doesn’t meet your criteria, can the product still pass the toll gate review? The answer to this question will rise in importance as consumers go beyond product, price and quality requirements. Country of Origin information, inherent financial and geographical risk of the proposed supply base, percentage of product content built through eco-friendly suppliers, ethical violations by suppliers, etc., may soon be questions that sales must address to earn future orders from their prospects. Both sales and supply chain leaders need to be prepared to proudly present their companies competencies in these areas.
Post-pandemic - where should procurement organizations start making improvements first?
If not already in place, companies need dedicated leaders who not only have the responsibility to assess their company's state of readiness, but have the power to take action. The first step is to write a charter and establish a governance process for making project-related decisions. Think of the charter as the “executive order”. Beyond the team’s objective, it provides a stronger element that confers power onto the leader to be able to gather team members, install capabilities and deploy a process. This charter is a commitment not only for the project leader, but more importantly a commitment from the boss to support the charter and to review the results of the process on a regular cadence. It is the boss’s way of telling everyone, “I want this done! Delay or make excuses at your own peril.”
Once in place, companies should be continually and critically assessing their own performance. The team leader, and the members of the team must set a high bar on their own self-assessment.
One thing is certain - there will be other disruptive events. We have no idea when, what and where it will originate, how long it will last or who it will be affected. We just know we have to be ready.
Leaders should be watching carefully how their team’s are performing today, and then ask how can execution-without-excuses be improved. This is a different era with new problems, new tools and new strategies. Leaders should be making themselves acquainted with what others are doing, especially their competitors. Customers may be understanding once, but only once.
Thank you to Joe Carson, CEO Spend Strategies LLC for his insights.
Partner | Futurist | Leadership Strategies at TCS
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***Full Disclosure: These are my personal opinions. No company is silly enough to claim them. I work with and have worked with many of the companies mentioned in my articles.