COVID-19 is impacting supply chains globally, and as a procurement leader, you may feel pressured to make critical shifts in your approach to prioritizing projects and examining risks in supplier relationships.
Whenever extraordinary circumstances prevail, the circumstances will begin to become an all-purpose justification for making any exception (for exceptional times are seen as demanding exceptional measures). Thus, many leaders may feel the temptation to re-invent all wheels, throw out standard operating procedures and revert to any action pattern that is recommended by authoritative sources.
While trusting experts – particularly public health experts – is absolutely vital during the global COVID-19 pandemic, suspending normal business operations for many organizations is simply not an option.
Consider the many businesses that are vital to sustain and support human welfare, such as healthcare professionals, emergency first responders, transit and logistics workers, and providers of food, water, medicine, and sanitation. If sourcing teams were unable to perform their vital role in these organizations, our critical infrastructure would be negatively impacted and the crisis would worsen.
Talk To Your Suppliers About Bullwhips
COVID-19 has triggered a wave of so-called “panic-buying” among consumers, particularly for sanitation products, dry goods, canned food, and cold medicine. Arguably, panic-buying is rational given the reality of a prolonged lockdown or shelter-in-place currently underway in major global cities. However, it is precisely this behavior that triggers bullwhips in many supply chains: spikes in demand trigger both price spikes and subsequent overproduction, resulting in pricey short-term inventory shortages and future wasteful surplus. There are three proven strategies for dealing with the negative economics of bullwhips: 1) in the short-term, paying more for faster shipping will enable your suppliers to acquire inventory faster, thereby reducing the risk of being caught short, 2) guaranteeing demand over a longer time horizon, rather than for a single rush order, and 3) creating a clear expectation for when any present surges of demand will be reduced.
Writing in Forbes, Harvard Business Professor Willy Shih noted that the bullwhip effect will impact any US-China supply chain due to the pile-up of shipping containers in Chinese ports which has now been occurring since the first quarantines and lockdowns several months ago. Suppliers may not need to sell a COVID-19 product or service to be affected if their ocean freight or third party logistics provider is caught short. For procurement negotiators, this situation offers levers for a win-win negotiation:
1. Offer to pay up-front for faster shipping for your suppliers in exchange for a 90 day supply and not-to-exceed price guarantee.
2. Offer to guarantee your demand levels and order quantities over the next 90 days in exchange for a supply and not to exceed price guarantee.
3. Set up a regular, recurring call with your supplier to confirm that your elevated “surge” demand forecast remains accurate so that they can have clarity into when the bullwhip is over.
Suppliers may not always have the capital reserves or access to credit to accelerate their shipping and warehousing of products or logistics when there are supply disruptions. By proactively offering to support their service levels, you build trust and gain critical insight into their perspective on cost-drivers outside of the usual suspects. Trust and early access to information from your partners will likely prove more valuable than whatever they can guarantee you if the pandemic worsens.
Talk To Your Team About Rules of Engagement and Exceptions
During times of heightened global uncertainty, signaling clarity and commitment gives your team a decisive advantage. What is the new “normal”? What counts as an “exception”? Taking time to revisit your team’s rules of engagement is worthwhile, as well as what exceptions require special vigilance.
If your team has the option of working from home or remotely, taking some time to establish ground rules for remote work, including expected contactable hours, an on-call rotation, and any other necessary communication frameworks can be a game-changer. Even if you think these expectations are “obvious”, for a team new to remote work there are clear benefits to addressing explicit expectations. It never hurts to verify everyone is on the same page for remote work circumstances.
What should your team do in the event of a lockdown? What if a family member of your team requires medical treatment during working hours, and they are working on a time-sensitive inventory project? Setting clear rules of engagement (including the succession or hand-off of critical responsibilities) and short, regular check-in calls can be vital. Checking in, offering support, and encouraging your team to report bad news or exceptions early and often will go a long way to making more informed, faster decisions.
Software that supports collaboration between your team and stakeholders (as well as suppliers) can also be helpful. Whether it is confirming a specification, seeking approval for outreach, or simply keeping everyone on the same page, cloud-based RFP and RFQ software like Arkestro can help your team stay on top of your pipeline, even when you can’t physically be in the same place. If your team is used to having face-to-face meetings, we recommend using a combination of Arkestro, Zoom, and G Suite to ensure business continuity. To minimize disruptions and boost productivity for teams suddenly working from home, using the Tasks feature within Arkestro to set reminders can replace valuable meeting time.
Review Your Alternative Supply and Compliance Framework
In the US, the Food and Drug Administration requires that drug manufacturers who face supply disruptions proactively identify alternative suppliers and manufacturers. In fact, currently the FDA requires *any* pharmaceutical company whose drugs are manufactured in China to proactively notify the agency regarding possible supply disruptions: “Since January 24, the FDA has been in touch with more than 180 manufacturers of human drugs, not only to remind them of applicable legal requirements for notifying the FDA of any anticipated supply disruptions, but also asking them to evaluate their entire supply chain, including active pharmaceutical ingredients (the main ingredient in the drug and part that produces the intended effects, e.g., acetaminophen) and other components manufactured in China.”
While these FDA regulations only affect drugs, food, blood/tissue, and medical devices, they embody some sound logic for supply chain leaders: plan for the worst and hope for the best.
For now, the good news is that healthcare supply chains and logistics networks seem to have enough resilience and diversification to avoid hitting supply chain managers with major shocks. For example, the Global Fund, a nonprofit that buys medicine and medical equipment to accelerate the end of AIDS and other widespread diseases, has rated the risk to “all pharmaceuticals, insecticidal nets, and freight and logistics” as “low to moderate”, suggesting that they do not forecast a substantial price impact. However, if you have a supplier who ships from China and what they are shipping is considered critical, the FDA guidance may provide a useful template: find a realistic, competitive alternative. Despite its optimism, the Global Fund’s supply chain guidance ends with the following suggestion: “As a precautionary measure, we recommend that all Global Fund implementing partners place orders 30 days earlier than normal to better manage any disturbances that may emerge in being able to deliver products on time.” The real question to be asking yourself is: what does the world look like in which every company follows this same advice?
Arkestro is here to support the sourcing and procurement community during COVID-19. Our team has set up a fund to help sourcing teams that are providing emergency medical supplies and other critical infrastructure services.