Why business needs new rules for choosing suppliers

Coro­n­avirus has sent shock­waves through the world’s sup­ply chains. As coun­tries locked down and trav­el restric­tions kicked in, there was a rush to find new sup­pli­ers and plug gaps that were start­ing to appear. Pro­cure­ment man­agers took unprece­dent­ed risks to keep the show on the road and sup­ply chains, which pre­vi­ous­ly had been rig­or­ous­ly man­aged, began to fray at the edges.

“In ear­ly-lock­down, the need to react swift­ly out­weighed the risks of a stream­lined due-dili­gence process,” explains Paul Massey, prod­uct direc­tor at man­age­ment com­pa­ny Proac­tis. “There sim­ply wasn’t the time for labo­ri­ous process­es of any kind; all parts of the sup­ply chain man­age­ment process were accel­er­at­ed. If you were lucky, the gaps were then filled in ret­ro­spec­tive­ly, but in many cas­es the risks were sim­ply accept­ed.”

Now, as busi­ness­es start to get to grips with the “new nor­mal”, COVID-19 has forced many to crit­i­cal­ly re-exam­ine their sup­ply chain struc­ture and future pro­cure­ment strat­e­gy.

Giving supply chains a strategic edge

“What the pan­dem­ic has caused is a need for infor­ma­tion,” says Nicole DeHo­r­atius, pro­fes­sor of oper­a­tions man­age­ment at Chica­go Booth School of Busi­ness, which recent­ly opened a cam­pus in Lon­don. Along­side issues such as capac­i­ty, buy­ers need finan­cial infor­ma­tion, too. Now, rather than a sim­ple box-tick­ing exer­cise, buy­ers are start­ing to mine down to get a real sense of how viable their sup­pli­ers are, she says, and whether they’re over­stretch­ing them­selves.

Chris Laws, head of prod­uct and strat­e­gy at Dun & Brad­street, sees the buy­er-sup­pli­er rela­tion­ship as a bal­anc­ing act, with speed on one side, risk on the oth­er. At the moment, he fears: “We’re see­ing it tip so far towards ‘do it fast, do it now,’ and ignor­ing the risk pol­i­cy, and that’s going to cause a prob­lem.”

Health and safe­ty issues, human traf­fick­ing, exploita­tion, mod­ern slav­ery: “they’re the type of things that we are at risk of miss­ing when we go too fast”, says Laws.

Build­ing a sup­pli­er map can help bring much greater vis­i­bil­i­ty and resilience to a sup­ply chain, he says. Just know­ing who your direct sup­pli­ers are is no longer enough.

Ben Col­lett, man­ag­ing direc­tor of risk spe­cial­ists Duff & Phelps, says: “Invest­ment in tech­nol­o­gy and infor­ma­tion flow allows greater vis­i­bil­i­ty and com­mu­ni­ca­tion through a tiered sup­ply chain. It may not be your direct sup­pli­er that is the source of a sup­ply fail­ure, but their sup­pli­er or a sup­pli­er to that sub-sup­pli­er.”

Harnessing the power of data

Data and dig­i­tal­i­sa­tion are also set to have a major impact, says Laws. “While data has always been part of the sup­ply risk assess­ment, it was typ­i­cal­ly only used as an effi­cien­cy play, rather than an oper­a­tional neces­si­ty,” he says.

Now busi­ness­es can lever­age data and ana­lyt­ics to uncov­er sus­pi­cious activ­i­ty. Map­ping out busi­ness rela­tion­ships and untan­gling large vol­umes of data can devel­op an accu­rate view of sup­ply chain activ­i­ties.

Laws also believes the pan­dem­ic will dri­ve a major shift in dig­i­tal­i­sa­tion. “A lot of sup­ply chains are still paper based,” he says, but with so many peo­ple now work­ing from home, the flaws in rely­ing on scanned doc­u­ments and a pre­car­i­ous paper trail are easy to see.

Alex Sar­ic, smart pro­cure­ment expert at pro­cure­ment soft­ware com­pa­ny Ival­ua, agrees that tech­nol­o­gy holds some of the answers. “The key is to be able to access all rel­e­vant infor­ma­tion on sup­pli­ers and be able to have a holis­tic view,” he says.

The next step for this approach is greater col­lab­o­ra­tion. “As organ­i­sa­tions strug­gle to ensure sup­ply con­ti­nu­ity, man­age cash and pro­tect the bot­tom line, they’re real­is­ing the impor­tance of work­ing close­ly with sup­pli­ers that them­selves are strug­gling with these issues,” Sar­ic adds.

“This has has­tened the shift in sup­pli­er rela­tion­ships away from being trans­ac­tion­al and cost focused, to ones that pro­mote col­lab­o­ra­tion and work­ing togeth­er on inno­va­tion and mit­i­gat­ing the impact of events like COVID-19.”

DeHo­r­atius at Chica­go Booth School of Busi­ness says: “Sup­ply chains have always over-empha­sised cost at the expense of resilience.” While flip­ping this may involve spend­ing more on build­ing rela­tion­ships and cre­at­ing a sup­ply chain that’s respon­sive and flex­i­ble at the out­set, the trade-off will be worth it, should anoth­er dis­rup­tion occur, she explains.

The importance of expanding the supply chain

Anoth­er trend designed to reduce risks is the shift to mul­ti-sourc­ing, as many com­pa­nies that relied on a sin­gle source for com­po­nents were found out at the start of the pan­dem­ic.

“We have seen buy­ers expand­ing sup­pli­er net­works to make them more robust, which spreads risk,” says Massey of Proac­tis. “This is par­tic­u­lar­ly per­ti­nent when geog­ra­phy is a fac­tor; many have retrenched from the glob­al sup­ply chain and are seek­ing options much clos­er to home.”

He has also seen an increase in ver­ti­cal inte­gra­tion, with large cor­po­rates buy­ing up ele­ments of the sup­ply chain, as they shun out­sourc­ing to bring capa­bil­i­ties back in-house.

While the start of the pan­dem­ic saw many com­pa­nies tak­ing excep­tion­al risks to fill gaps in their sup­ply chains, many will now be bet­ter pre­pared for fur­ther dis­rup­tions. For Massey, this means due dili­gence and rela­tion­ship-build­ing will soon be back as con­stants in sup­ply chain man­age­ment.

“How­ev­er, there is now a real need for organ­i­sa­tions to put process­es and tech­nol­o­gy in place that make sup­pli­er sourc­ing and onboard­ing as quick and pain­less as pos­si­ble,” he con­cludes.