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Has COVID-19 broken your supply chain?

Image of Charles Dauber
Charles Dauber

The global supply chain industry has made considerable progress over the past 20 years. Utilizing lean/just in time techniques and the globalization of supply chains has enabled companies to reduce costs and shorten delivery times for millions of companies. 

Unfortunately, these costs and efficiency gains have come at the expense of supply chain resiliency. The tighter and more efficient supply chains are, the more susceptible they are to disruption.  

For organizations in industries like manufacturing, construction, chemicals, and automotive with significant supply chain criticality and/or low margins, this has created significant threat to their entire business. 

In 2003, the SARS virus affected electronics manufacturing for tech companies by affecting their suppliers in Taiwan and China. In 2011 a tsunami that hit Japan caused a GM auto manufacturing plant in Louisiana to be temporarily shut down due to lack of critical components. 

Accenture recently reported that 94% of Fortune 1000 companies have experienced supply chain disruptions from COVID-19 which has resulted in 75% of companies having a negative or strongly negative impact on their businesses. 

To address supply chain disruption risk, many companies simply choose to increase inventory levels to create a bufferGiven the corporate need to protect cash, and the reality that most companies don’t know the true status of their critical suppliers, it's likely that investing precious cash into the wrong inventory won’t create a more resilient supply chain. 

Companies today must evaluate their supply chain to fully understand more than just the status of material as it is transported from supplier to where you need it to go. Understanding the suppliers, their financial and operational risk, and the potential impact on your organization are all critical for reducing supplier risk. 

This is not just a requirement for the Fortune 1000 companies with massive investments in enterprise supply chain platforms. Recent technologies have advanced so that medium and smaller companies can have better supply chain visibility as well as more control than their larger competitors, who previously invested in now outdated procurement systems. 

Understanding Your Supply Chain  

The first step in understanding if Covid-19 has broken your supply chain is to determine what business critical products and services are in your supply chain, which companies are supplying them, and, how important they are to your current business.  

Purchasing systems should be able to show where money is being spent and with what suppliers. But are those really your critical category suppliers? To gain full supply chain visibility an understanding of both commercial and operational criticality input is needed.  

Start by gathering existing commercial data on your category spend and current suppliers. This will come from your existing financial, procurement, ERP or MRP system. All this data can easily be combined and organized in a spreadsheet. 

Another element to look at is profitability and the impact of what you are buying from the supplier is on your bottom line. How integral to your company profits is the product, service, or category?  

Explore the operational criticality and risk profile of the products and services your company offers. Engage with key stakeholders to understand which are products and/or services that are single sourced or ordered through OEM’s (Original Equipment Manufacturers), which companies supply parts, equipment, or services, and if you were unable to obtain the products how would your organization be affected?  

Now that you have collected feedback from business operations as well as spend data from your procurement systems, you are ready to segment your supplier base by criticality. 

Category and Supplier Segmentation 

Segmenting your supplier base, is a crucial step in structuring a risk management strategy. Using the very well-known Kraljic Matrix (see figure 1 below)the products and services your company purchases can be bucketed into four main categories which will then characterize a buyer supplier relationship and help you define your supply strategy.  

Kraljic Matrix

Source: Forbes.com

Strategic – The strategic category has considerable risk but also high profit and returns. There will only be a small number of items in this category which means it’s imperative to figure out what these products are and who the suppliers are to implement a strong strategy that will capitalize on the opportunities and mitigate the potential risks. 

Leverage – If what you are buying falls in the Leverage category, you can assume there is a lower risk with higher commercial returnsIn this category, you might have the upper hand in the buyer-supplier relationship. In today’s market, this is a great category to support and influence your suppliers to think innovatively.  

Bottleneck  The Bottleneck category is where profit or commercial impact is low, but the risk is high. You might see an absence of alternative suppliers, which could take up a lot of your procurement teams time with minimal rewards.  

Non-critical – The Non-Critical category is items where the risk and the impact on profitability and business disruption are lowProducts and services that fall in this bucket can take up a lot of time and resources if a suitable strategy isn’t implemented.

Define Category and Supplier Strategies

Supply Chain Strategies

Figure 2 Source: The Smart Manager

Now you redefine/define your strategies for what you buy and the suppliers who provide this (figure 2)How does this differ from what you were doing? Create routines to manage these efforts so you are reviewing and updating your strategies continuously which will allow you to create sustainability within your supply chain 

Strategic – Go deep into defining these strategic relationships as there are only a few but will have the most opportunity and impact. These will be a big opportunity for long term relationships, shared gains, and a partnership to leverage and expose potential process or product innovationWhether it’s new or existing product, think about bringing your suppliers into development or enhancement discussions to use their knowledge. Managing the risk in this category is extremely important because of the strategic impact these items and suppliers have on your supply chainWho are their direct suppliers, which are your tier 2 and 3 suppliers? These could be indirect external factors that could inevitably disrupt your supply chain. Do you have any alternative suppliers or product/service substitutes? Knowing who or what these are will help you build some resiliency into your supply chain and mitigate risk if there is disruption.  

Leverage  The leverage bucket offers varying suppliers to choose from and low switching costs. However, you don’t want to just go for price reductions, as that can drive suppliers out of the market and reduce competition. Spend time building relationships with your suppliers and bringing them into discussing to explore innovation and product developments. This could help you see even bigger returns for items in this category 

Bottleneck – In the Bottleneck, the supplier has the advantage because you need to buy products from them. This would be because it might be an OEM or there are only a few suppliers that provide what you need. If you have suppliers that are good to work with in this space spend time building relationships and working on product enhancements or optimization. Work on securing contract terms that reduce the cost and risk exposure, including a guarantee of supply. Set up your supply strategies earlier to avoid having your hands tied later, especially for new projects 

Non-Critical  Strategies for non-critical items should focus on using varying supply chain techniques and automation to reduce the administrative burden that these items can generate. Leverage your ERP systems to automate purchase orders, outsource or shore activities to a 3rd party that has large buying power for these items or use tools such as e-catalogues and e-auction to buy these items. Use the time savings to focus more time on the Leverage and Strategic buckets 

Using the suggestion above, you will have the correct level of focus, efforts, and strategies in place to understand your supply chain and your suppliers as well as have embedded deliverables to start creating a sustainable and resilient supply chain that will see you through this pandemic and prepare your company for recovery. If you would like to learn how Warm Commerce can help your company build a sustainable and resilient supply chain, please contact us. 


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