Covid-19 Outbreak: Risk Management practices to create a robust Supply Chain

We are currently in the midst of one of the worst public health crises of this generation, the Novel Coronavirus (nCovid-19) has affected more than a million people and have already taken 82,000 lives at the time of writing this article. As India and the entire world is strengthening its measures to fight this pandemic, the priorities for governments, individuals and businesses have shifted globally. From small third-tier suppliers to million-dollar conglomerates, the impact of the novel coronavirus has been felt by everyone which would take years to recover.

According to Business Today, the hospitality sector will lose around Rs, 30,000 crore in revenue, while the figure rests at 8,200 crore for the aviation industry. The procurement industry has not been untouched by it. Manufacturers are finding it difficult to operate, as the lockdown has led to temporary shutdown of factories. According to InvestIndia, the manufacturing sectors of medicines, electronics, textiles and chemicals are the worst ones to be affected. This is a cause of major concern since these sectors are worth $30 billion a year, with around 70% of the active pharmaceutical ingredients and 90% of mobile phone components come from China.

The coronavirus pandemic has added an extra layer of pressure to mitigate supply chain risk on top of the challenges of maintaining compliance and managing suppliers. India’s credit rating agency ICRA points out that according to their survey, over 70 percent of the respondents have faced or are likely to face supply chain disruptions because of COVID-19, and 35 percent of the respondents said there were no alternative sources of input material in the event of supply chain disruptions. Consumer Business Head and CMO of Acer India, Chandrahas Panigrahi, points out that the shortage of products from parts from China had thrown the electronics manufacturing community into unparalleled challenges.

Amidst the disruption in the supply chain due to limited access to manpower, factory closures, manufacturing slowdowns, and limited or no access to logistics; businesses are facing a hard time in crisis management. Every company is currently in a crisis management mode, even those with advanced risk management programmes — not only do they have to ensure the safety of their workers but also protect their operational viability. According to Sarah Watt, Senior Director Analyst with Gartner Supply Chain Practice, the global spread of Coronavirus will not only lead to disruptions in Supply Chain but also a shift in the consumer spending habits.

The risks involved with this pandemic are not only restricted to disruption of the supply chain. Brand Risk can primarily impact the top line and can get the attention of the C-suite. Price-risk events can also play a significant role, a material impact on the prices being paid for key inputs is highly likely. The primary challenge would be to identify the loop-holes and the pain points in the supply chain causing these issues, doing the same without a system which is not automated can be time-consuming and counterproductive. It is nearly impossible to fix a problem without knowing its source of inception. Classifying potential risks within this framework will ensure a better preparation. All organisations should take a stride to monitor their supply chain and ensure the longevity of their business. In these situations, companies should be looking for the best practices to be followed to get back in business and avoid crisis situations in future.

Here are the risk mitigation practices that can be followed to counter this global pandemic:

1. Diversifying Vendor Base -

Many organisations rely on a fixed network of vendors for their supply needs, in case their vendors fail to deliver, they are left without any backup plan. Whether it is due to the pressure to maximize efficiency, reduce costs or to find the lowest-cost supplier; having a single source of purchase makes a ten-fold increment in the risk factor. Companies should increasingly look for alternate sources of supply, especially in severely affected regions. Manufacturers should create a list of Tier-2 vendors along with their Tier-1 Vendor list in order to ensure that risk is mitigated. Purchase teams should be in constant communication with all of their suppliers, across all tiers, to form a series of joint agreements to monitor inventory levels as a precautionary system for interruption and establish commodity-based risk management plans for their prominent suppliers. Inventory management is one of the foremost things faced by companies. Quality Issues can also create a problem during inventory shortage. As surveyed by Supply Chain Magazine Review, one of the primary concerns for the purchasers is the potential quality problems. Supply and demand should be frequently assessed as the virus may completely change the buying habits of the consumers. Having now experienced a new way of living, consumers will recalibrate their spending, increasing the likelihood that spending may permanently shift between categories and that online services could get adopted far faster. Major e-commerce companies have already started to venture into the essential commodities market at a more rampant pace and are trying to ensure a contactless delivery. A more prominent problem can be panic buying among the customers. If the lockdown is prolonged, organisations should assess the impact of their current inventory stock. Digital procurement services can provide access to an inordinate network of vendor bases, providing the buyers to ensure a contingency plan is set up. This can assist in mitigating one of the biggest challenges in creating a robust supply chain.

2. Adopting a transparent procurement strategy -

Social distancing and other protective measures for CoVid-19 have clearly justified that operations dependent on physical assets, such as paper, can face serious disruption when physical presence is not a possibility. Without any digital, transparent system to work with, organisations are often faced with monumental challenges on the management front. The management has little or no information about the dealings of the purchase teams, which, especially in times of crisis can lead to obfuscation, human-induced errors and an unproductive opaque system. However, procurement is now swiftly moving to the cloud. In accordance with it’s Digital India campaign, India has already launched two procurement specific platforms — Government eMarketplace and eNAM, the industry is following suit. With investment in cloud procurement rising up, the migration to the cloud is gaining momentum, and as employees are increasingly avoiding outside exposure, it would be a good practice to shift businesses and industries to a secure cloud-based platform. Cloud solutions can be disruptive for a procurement process, helping it in terms of cost effectiveness, energy efficiency, and a more coherent and navigable supply chain. By building and reinforcing a single command centre, a supply chain which is digital strengthens capabilities in anticipating risk, effectuating visibility & traceability, and managing issues that arise from operational execution. To improve contingency planning, real-time visibility on the tracking of on-time status of freight in transit and monitoring broader changes such as border closings needs to be present. Maintaining a nimble approach to logistics management will be imperative in rapidly adapting to any situational or environmental changes. As the virus engulfs countries globally, digitising interactions between the vendors and the buyers on an end-to-end platform is the need of the hour.

3. Optimizing Production -

From the current trend, it seems like the current crisis is here to stay and it might be months if not more, for the true impact of supply chain disruption to manifest. Procurement processes, especially in India involve a lot of paperwork, agreements, terms and conditions to sign, which often delays the process by days or weeks and decreases productivity. As the Digital India campaign progresses, AI, Big Data, Internet of Things (IoT) are expected to galvanise sectors ranging from agriculture, transportation, urban-infrastructure and manufacturing to name a few. More and more mobile applications are being launched to provide services such as raising a purchase order, approval and continuous checks on delivery time. Artificial intelligence and natural language processing can reduce the paperwork by flagging suspect clauses. Online bidding of tenders can be done through artificial intelligence. A more advanced version of Natural Language Processing might even spot invoice anomalies and detect fraud. Thus, having a centralized system for all the supply chain and procurement needs will ensure that the procurement leaders have enough time on their hands to deal with such unprecedented risks. Having a list of suppliers’ manufacturing and warehousing sites would be immensely helpful to optimize production, and avoid a total loss of supply in future scenarios. When companies will know beforehand, where the disruption might come from geographically and which products will be impacted, they will have time to execute mitigation strategies immediately — like shaping demand by offering discounts on substitutes, buying up inventory, booking capacity at alternate sites, controlling inventory allocations, and so on. In the first few weeks of January 2020, companies that had their supply chain mapped, already knew which parts and raw materials were originating in the Wuhan and Hubei areas and, as a result, they were able to bypass the frantic hunt for information and fast-track their responses and create a risk mitigation strategy.

Even automation of tasks such as MIS Report generation and integrating purchase orders with Enterprise Resourcing Platforms can aid the supply chain teams in their quest to create a robust process which can be resilient for decades to come.

4. Creating a resilient financial structure -

As businesses have come to a halt, supply chains have become constrained, dwindling sales and reduced profit margins will force businesses to look for better ways to manage their finances. One of the major areas in which procurement and supply chain organisations can work is reducing the price at which they buy the commodities. Digital products which allow live bidding with an extensive vendor base would ensure competitive bidding, and can contribute substantially in cash savings. Secondly, using data analytics to manage procurement data in a better way will ensure that companies save directly on costs incurred and can see their spend analysis. Deloitte Global CPO survey reports that analytics will have the greatest impact on the procurement process in the coming years. According to Deloitte, companies will use analytics for cost optimization (50%), process improvement (48%), and management reporting (45%). Predictive Analysis can help companies track their purchasing patterns over time to help them conduct effective cost-analysis. This allows the teams to be proactive and take preventive measures, allowing them to stay ahead of the curve. As an immediate measure, supply-chain stress-tests should be conducted on a regular basis in order to get a better understanding as to when they company may face liquidity issues. Estimation of inventory should be done along the value chain, and after-sales stock should be used to bridge the gap in case of late delivery, to keep the order running. Having a digitized platform will also allow companies to keep an audit trail, their entire cost data from quotation requests, to auction negotiation and purchase costs, not only helping them with better insights but also ensuring compliance.

5. Vendor Financing -

According to Supply Chain Magazine Review, on average about 45% of the suppliers of the firms surveyed could continue to supply if they suffer a disaster in one location. It means that more than half of the firms and vendors (55%). Due to the ongoing lockdown, vendors may refrain from supplying the goods without an upfront payment, creating a persistent risk factor for the organisations. Few companies have unlimited liquidity resources to tie up in vendor finance structures. Vendor Financing services can aid the companies amidst this crisis. It allows companies to obtain trade credit from financial lenders, without having to use their retained earnings thus enabling them to maintain their working capital cycle, preserve the much-needed cash and ensure unhindered supplies from vendors. The purchase teams are able to buy goods that might have been unaffordable before, it also speeds up the entire process as the purchaser does not need to source for financing. Not only does it ease the cash flow, but it can be an effective practice to save tax too. In some cases, vendor finance may arrange for the lease of products as opposed to the full payment. Many suppliers do not charge interest on payments made within 30 days of the date of purchase, which aids the buyers if they have a quick production process or a distribution or retail business that moves goods quickly to the end-customers. Using practices such as vendor financing, it can be ensured that organisations can pay off the debt at a later stage, when they are more financially secure and better in control of their business.

It is evident that both buyers and suppliers are facing a monumental challenge in maintaining the flow of goods and services during a global lockdown. Supply chain professionals cannot afford to delay fortifying their supply chains against disaster. Regardless of whether a company is small in size or a goliath, or its geographical scope, there is no shortage of methodologies to help identify and prioritize risks. Companies must take advantage of the information and tools available now in order to ensure continuity and resilience for the long-term if they want to remain competitive in the supply chain market.

Any new initiative will take time to roll out. If companies start instituting practices such as digitising their procurement, use data-driven insights to manage their finances, integrate services such as vendor financing to aid their cash cycle and expand their network base by attracting new vendors, it would leave them in a much better position to deal with a future crisis situation. Effective communication is also one of the key factors which can play a significant role in rebuilding the supply chain in order to make it future-proof. Purchase officers and procurement specialists need to be fit for automation as more and more companies are shifting gears and adopting these new technologies at a rapid pace. There is a need to reinvent traditional approaches, allowing leaders to focus their resources on strategic initiatives, and curb indirect expenses. With the integration of sourcing, purchasing and procurement technologies, organisations should be ready for this transitional shift. Building towards a more digital ecosystem in procurement should be the priority for the entire procurement industry. The advantages provided by a digitized procurement solution is unparalleled. We can already see the traces of technology reshaping the industry, however, in terms of impact we are only at the tip of the iceberg.

The Covid-19 crisis will surely have lasting effects in the supply chain and procurement industry, and for the world economy as a whole; As the pandemic ripples throughout the world economy, it’s possible that it may begin to change the way global supply chains work and although these outbreaks are impossible to predict, a proactive approach to risk management, with the complete set of tools can absorb the shock. Utilizing data and forecasting tools correctly would be a first crucial step for companies to make strategic decisions and navigate the turbulent market environment. When the dust clears, a detailed plan needs to be created to ensure that businesses return to normal and the entire future of the supply chain industry needs to be reimagined based on the ramifications caused due to Covid-19. By taking precautions during these months, companies can emerge from this crisis with better preparation and planning. In future, the coronavirus may be dubbed as “The virus which changed everything”, and if that is the case, the entire supply chain industry better be prepared for the coming changes.