Yes, the coronavirus pandemic has flipped global supply chains on their heads and has disrupted markets in dramatic ways, but not everything in its aftermath has been doom and gloom. As forward-thinking companies know well, nothing drives agile decision making and innovations in the supply chain more effectively than times of crisis.
This article is from FRA's sister company, Compliance Week.
Dire shortages in personal protective equipment (PPE) is one such area, in particular, that has resulted in some dramatic and positive shifts in global supply chains—promising news at a time when supply management practitioners around the world say that “increased demand for health and safety items” is their greatest challenge caused by the pandemic. According to a recent supply management report by CAPS Research, 40 percent of 115 global companies listed increased demand as their top challenge. Relatedly, the No. 1 action supply-chain groups are taking in response to the pandemic is “high-level of sourcing for health and safety items,” cited by 70 percent of respondents.
Supply chain executives, however, say they’re encountering numerous challenges in sourcing PPE. Those top challenges include PPE shortages (80 percent); delivery dates being moved by suppliers (59 percent); price-gouging of PPE (46 percent); and PPE being delayed at ports of entry (38 percent).
Companies must also beware of PPE suppliers that are not qualified, certified, or even registered to provide such equipment. To help in this effort, third-party service provider ethiXbase recently announced it has partnered with CalPac Market to create a database of reputable-only PPE suppliers. The initiative was established by Caledonian Pacific, an ethiXbase client.
Coming up with solutions in response to PPE shortages are where truly innovative and agile supply chains can get ahead. “We’re seeing a lot of creativity now in the different supply chains,” said Finn Wynstra, professor of purchasing and supply management with the Rotterdam School of Management (RSM), Erasmus University, in the Netherlands.
During a recent RSM Webinar, Wynstra discussed both productive and not-so-productive ways to engage suppliers during this time of crisis. One element of responsible and effective procurement is joint business development, he said, which can be a particularly helpful solution as it relates to PPE shortages. According to the CAPS Research, 24 percent out of 108 of the respondents said they’re “partnering with suppliers to pivot their manufacturing capability to produce PPE items.”
In fact, several companies in recent weeks have shared stories about how they’re turning the pandemic into an opportunity, shifting their factories and production capacity to meet high demands for PPE for hospitals and healthcare facilities. Take clothing retail company H&M, for example. “Instead of clothing, many suppliers are now manufacturing large quantities of personal protective gear that we donate to hospitals and health care workers around the world,” the company announced. Clothing company Eddie Bauer similarly announced in March it was temporarily shifting portions of its production capacity to make N95 and surgical masks.
Innovations in technology allow for even greater business agility. Flowfold, a maker of travel and lifestyle gear, said it has pivoted its entire business to make PPE, thanks to its technologically advanced factory, which includes a material-cutting machine. “Given the shortage of PPE in hospitals across the country, we have suspended production of our usual line of bags, packs, and related travel and everyday accessories and switched to the production of face shields,” the company announced.
Nike announced a similar initiative to transform elements of its footwear and apparel into PPE, as did custom ski boot company DaleBoot, which announced it has transitioned its ski boot manufacturing lines to produce protective face shields. More examples like this are arising every day among companies of all sizes in all industries all around the world.
Supply chain risk mitigation
Second to an increased demand for health and safety equipment, another top challenge due to the pandemic, as cited by 14 percent of respondents in the CAPS Research supply chain report, has been the “decreased source of supply from ‘hot zones.’” Some actions supply chain teams are taking to hedge this risk include increased monitoring of supplier financial risk; assessing sub-tiers in the supply chain to identify vulnerabilities; and shifting to alternate sources, notes the report.
What the pandemic has stressed is the critical need for supply chain and procurement executives to reduce their dependency on a single supplier and/or a single geography. Rather than secure a high-volume commitment from one supplier, particularly regarding a long-term commitment, Wynstra suggested considering a more flexible arrangement. For example, rather than commit to buy 100,000 widgets from a sole supplier next year, it might make more sense to buy 80 percent of those widgets from one supplier and the other 20 percent from another supplier, he said.
Where alternate sources aren’t possible, consider other back-up options. “You can even ask your single-source supplier to help you organize such a backup,” Wynstra said. That supplier may be able to get you access to other production facilities or factories spread across geographies to mitigate logistical issues, such as border closings.
Just-in-time inventory—the practice of ordering products only when needed—may also become a thing of the past. In a post-pandemic world, a return to regional sourcing may be another attractive option. In some geographic regions, it may be worthwhile to have a supply base organized regionally, where one supplier serves Europe and another serves Asia, for example, Wynstra said.
With all these supply chain risk management practices, it’s critical to have complete visibility across the entirety of the supply chain through risk mapping, including visibility into third- and fourth-tier suppliers and beyond. “The cost of doing this has decreased, thanks in part to artificial intelligence and more public data available to help you map your supply chains,” Wynstra said.
Now more than ever, it’s critical for supply chain teams to be able to identify the company’s most critical suppliers—from both a cost and operational standpoint—and track in real-time suppliers’ inventory and production capabilities. Companies that are digitizing their supply chains have much better insight into the agility of their suppliers to either ramp-up or ramp-down production in a moment’s notice, not to mention far more flexibility in reducing supply chain risk.
Reevaluating supplier contracts
The pandemic also points to the need to reevaluate supplier contracts. Performance-based contracts are one such consideration. “There is big potential for performance-based contracts to be applied more widely,” Wynstra said. “The essence is that part of the compensation of the supplier is tied to performance.” This essentially means that you’re buying a service, rather than an asset, he said.
While applicability of a performance-based contract depends on the type of asset or service being provided, Wynstra discussed the following examples: pay-on-availability (e.g., airplane engines or production machines); pay-on-use (e.g., paying for access to an asset only when you’re using it); pay-on-qualitative outcomes (e.g., compensating suppliers based on the quality of the work done); and pay-on-revenue (e.g., basing rent on the turnover that tenants make in their shop, rather than charge a fixed rent).
Supplier payment terms
The pandemic is also resulting in renegotiations of supplier payment terms, with some companies extending their payment terms and others shortening them. Across all industries, several companies have announced they are reducing payment terms for some of their suppliers and/or they’re making immediate payments for outstanding invoices to help keep their smaller suppliers afloat during the pandemic.
Wynstra shared a few other payment method options to help keep a healthy supply chain. With actual deliveries, for example, options include paying on time; considering supply-chain finance options, in which the supplier gets payment earlier through a supply chain financial intermediary; or ordering ahead and investing in inventory to prepare for an eventual ramp-up.
With postponed deliveries, consider paying in advance—supplier vouchers, for example. “You can even think about paying for production-cost build up, particularly for high-cost items or when buying raw materials from suppliers,” Wynstra said. Canceled deliveries present another situation where it might make sense to pay for production-cost buildup, particularly when there are no alternatives.
Finally, don’t forget about treating suppliers ethically and with integrity, which essentially means treating all of them fairly and consistently. “The notion of integrity or ethics seldomly comes up in these discussions,” Wynstra said. Yet, it’s in the best interest of buyers to behave ethically to help preserve their supply base, he said, and foster collaborative supplier relationships where they’ll want to help you out.