We are living in uncertain times. Tragic health-related personal consequences are combined with tragic company-related effects related to the ongoing Covid19 pandemic. Even before the ongoing pandemic, we were in a turbulent trade situation with the trade war (the USA vs. China) and the Brexit process. Previous truths about the global availability of both sales and purchasing markets of free trade have been dramatically driven to a more regional and national market for companies to act on. With almost 30 years of experience in supplier relationships as a buyer, I have seen several crises come and go. What we now see follows many old patterns of corporate governance but will certainly affect the future.
With many cases of dramatic decline in corporate income, it is important to keep all costs down. During the last financial crisis in 2008, with, in some cases, months with “negative sales” (i.e., a customer returning orders), all costs were cut to a minimum. In addition to its personnel cost measures with layoffs and notice, all external costs were severely cut. Only the most necessary supplier costs were allowed. With today’s development, however, I see a more serious “survival struggle” for many industries. Thus, companies and their buyers face an even greater challenge than during the backwash of the financial crisis.
Experience shows that there are several areas that companies should now focus on. Here are some of them:
- The primary concern is to handle communication and to ensure quick decision paths. Since all measures are now carried out in a “firefighting mode”, to solve short-term financial stress but with long-term effects, the company’s purchasing operations must be very close to the operational management of the company. The communication with the suppliers must be controlled, rigorous, and come from the buyers who own the contracts. Buyers must control this process and decide when they engage senior managers in communication and decision-making. Internal communication between operational management and purchasing must also be clarified and strengthened.
- Temporarily break up the division of a strategic and operational (stock planning/call-offs) purchasing business and become a purchasing unit. Now all measures are “operationally necessary with a strategic impact”. Purchasing strategists must now act operationally with daily stock management issues and inventory balances at the same time as assessments of suppliers’ survivability. Previously long and well-analyzed decision-making processes must be characterized by daily quick decisions.
- Ensure transparency of the company’s external costs, from a holistic perspective down to the retail level. It is important to take the right actions in the right area in a priority sequence! Crisis cost budgets (alternate cost outcomes) must be translated into purchasing budgets. Close cooperation with business controllers and purchasing must be ensured.
- Both direct and indirect suppliers must be sorted into how critical they are to your company. Plans for the most critical suppliers and their deliveries of products (or services), as well as their survivability, should be on hand to facilitate quick decisions. Also, think about how critical you are as a customer for the supplier, maybe you are no priority at all? Maybe it is the supplier’s biggest customer’s volume loss (and not yours) that puts your supplier in bankruptcy?
- With the closure of countries and borders, in addition to normal industry assessments, the geographical “footprint” of the suppliers and their subcontractors must also be assessed. Many times, companies do not know where suppliers secure their input material. Logistics and shipping routes have a very big impact on this crisis.
- Variable costs only associated with real income must be accepted. Fixed costs (rents, energy, etc.) should be negotiated, every penny count! Keep in mind that indirect costs are many times the same as direct external costs but with significantly more suppliers involved.
- Review which KPIs apply to the company and clarify or create new ones that match the needs of the situation. Make sure that every buyer can see their contribution to the “crisis KPIs” daily and follow up on them!
- The management must devote extra thought on its purchasing staff. Many employees are exposed to pressure that is beyond the ordinary. Suppliers act irrationally and many times emotionally, as in some cases small companies are struggling for their survival. It is tough as a buyer to be the “intermediary” between the company and the situation’s demands for measures and the supplier’s ability to survive the situation.
Since 2000, we have become accustomed to an open global trading environment that we have taken for granted. Now is probably a time of major obstacles. What, then, is important to consider for a perhaps new competitive supply chain? Will sustainability issues perhaps play a greater role as an evaluation criterion in selecting a new supplier?
By Kenneth Lennholm