For as long as I have known, procurement organisations have been measured by its efficiency – this could be determined by the savings they produce, quicker turn around times and efficiency in approvals (“Where is my PO stuck?”, “When will my goods arrive?”, “When will my supplier get paid?” are terms everyone is familiar with).
As described in my previous article, Covid-19 has changed the way procurement functions and works! After all, what’s better to do in the aftermath of a crisis than to learn from it and change the way we work. Resiliency is the need of the hour.
In July 2005, I was working for a large company in Mumbai that was in the process of implementing a data center for its customer. Everything was going great. Goods were being delivered by the suppliers on time, the installation and implementation was in full swing. We had ordered tape drives (DL-380 if my memory serves right) from a supplier in Finland. The tape drives arrived at the customs office on 25th. We cleared them from customs (there are a billion forms involved) and brought them into our warehouse on the 1st floor of our facilities in the outskirts of Mumbai – which also housed warehouses and logistics facilities for a lot of companies. The installation was scheduled to take place on the 28th (as there was some pre-work – cabling etc. that needed to be completed). If you are familiar with what happened next – it was a nightmare that one couldn’t have fathomed. The Mumbai floods impacted each and every inch of Mumbai like never seen before. By the evening of the 26th, the tape drives(along with a lot of other equipment and most of Mumbai really) was submerged in water.
So we now had procured a tape drive that was expensive, not delivered to the customer and hit not only the looming data center installation deadlines but as anyone in supply chain is painfully aware, the insurance did not cover natural disasters and hence it hit our costs as well. As luck would have it, the supplier did not have another one ready for shipment either. Not surprisingly, we quickly then had to fold the costs within the margin of the whole project leaving us with absolutely no more room for error or delays. Needless to say, it ended up being a project where the cost was higher than the sale!
In the aftermath of this event, we quickly went about building more strategic long term relationships -ones focussed not just on the money aspect and efficiency(SLAs) with our suppliers that were just collaborative in nature.
I think the Covid-19 situation has brought about a number of similar challenges. How can we ensure resilience in the procurement organisation that will help meet the challenges if and when the next wave of Covid-19 happens or in the aftermath of this pandemic? What about resilience in wake of Brexit?
Focus on long term relationship fostering with your suppliers – Treat them as partners. Remember that great relationships are built are trust – this applies to your suppliers too. What this means is that you are no longer measuring your suppliers on efficiency alone but you create meaningful gain share contracts that lets them play a strategic role in the way you do business. Contracts are not just about how much savings you can deliver, but what is the right price to do business at which keeps the supplier motivated equally.
One of the key changes that we see taking place in the aftermath of Covid-19 and rightly so – is organisations taking stock of their risks and assessing if it is indeed wise to have single source supply bases for critical items especially when you consider:
1. Due to companies having focussed before on reducing costs and building efficiencies, the single source suppliers more often than not tend to be based in Asia or other low cost countries.
2. For those suppliers based in such countries, deliveries are still delayed and challenging considering not just the amount of restrictions on trade per se that have been imposed by individual countries but also the logistical nightmares in terms of transport that Covid seems to have created.
The pandemic also seems to have created a volatile demand of goods – for instance, there was a spike in toilet paper purchase, which we all know will lead to a lesser than expected demand in the coming months for toilet paper and other such commodities. Costs for raw materials are also increasingly volatile owing to region specific shutdowns.
The point I try to make is this: Sometimes, it is not easy to to balance efficiency and resiliency. But the cost of doing nothing will also be very significant. In summary, here are some of the steps an organisation can take towards being resilient:
1. Build a strong partnership with your suppliers.
2. Diversify your partner ecosystem.
3. Ensure sufficient capacity buffers in your inventories/stock/forecasts.
4. Take stock of your procurement function, now!!!
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