Sourcing Won’t Be Just About Cost Minimization Anymore
In 2008, leveraged financial positions collapsed in value. Investors assumed incorrectly that American housing prices were unsinkable. Margin calls and firm failures cascaded as hidden risks emerged. Similarly, today, a black swan contagion plagues supply chains spanning multiple sectors, globally. The unexpected coronavirus revealed interconnected exposures that companies underwrote to operate lean.
CFOs can learn lessons from the way in which the post-GFC financial system evolved. In describing financial markets post-coronavirus, Heath Tarbert, Chairman of the CFTC, told the FT, “The story thus far has been a very good story, a story of resilience.” For companies that take the lessons of today’s Black Swan to heart, managing the full picture of risks will replace a narrow transactional mindset.
Optimize for Competitive Advantage: As Kearney’s Patrick Van den Bossche told Supply Chain Dive, “Companies have now realized that optimization for cost is not the right answer if the risk of disruption is spiking every few years …”
For commoditized industries, minimizing costs is sensible. But industries that generate sustainable margins can and should leverage procurement to enhance the value they add, while working to minimize the risk of disruption.
Firms will diversify purchasing, foregoing the bulk discounts of concentrated buying. Simulating scenarios to quantify vulnerabilities to outsourcing and offshoring will require structured data and new analytic tools, shared across the enterprise.
Coronavirus will accelerate the trend in which CPOs are “expected to enhance their influence with C-level peers and extend their business impact into strategic areas such as risk management, corporate development, and innovation.”
Develop Visibility and Relationships: Buyers are discovering the perils of not knowing who sells to their suppliers. Buyers will require deeper visibility into their supply chains, using this information to adjust their acquisition decisions and mitigate risk. The best buyers will use this knowledge to understand what is happening at the edge. PwC surveyed CFOs in April 2020 noting that firms are thinking about “risk warning systems” and “visibility into supplier health.”
A great success story is Alberta Health Services. Their procurement team paid attention to early rumblings from their local connections of a “strange flu” in Wuhan. AHS was able to pivot, getting early access to PPE supplies.
Relationships provide key intelligence in real-time, but they also determine who gets their orders filled in times like these when contracts are just words on a page. “Often a series of phone calls or emails to company leadership or the right operations contact gets the supply lines running again. Call it the relationship dividend.”
Collaborate (even with Competitors): Buyers are working together with other buyers to get through the worst of this crisis. Here’s Jeff Wincel, the Chief Procurement Officer of AMD: “It’s allowing companies to survive this … Companies are now able to learn from one another in real-time through collaboration. It’s changing the nature of how companies view competitiveness.”
Not everyone will adapt to the new reality. We have had previous supply chain disruptions, albeit smaller and more isolated like SARS or Fukushima. Companies that do not change now will be held to strict account by stakeholders during the next pandemic crisis.
As McKinsey notes, “Organizations should build financial models that size the impact of various shock scenarios and decide how much ‘insurance’ to buy through the mitigation of specific gaps, such as by establishing dual supply sources or increasing production. The analytical underpinnings of this risk analysis are well understood in other domains, such as the financial sector — now is the time to apply them to supply chains.”
Supply chain management is risk management.