Executive Summary
The majority of companies did not heed the lessons of the natural disasters of the last decade and, as a result, suffered severe supply disruptions when the Covid-19 pandemic struck. To make sure the same thing doesn’t happen the next time around, they should map their supply chains in depth, which includes identifying alternate sources of items; changing the way they assess the performance of their procurement function to include revenue assurance and not just cost savings; and incorporate disruption-related metrics in their evaluations of suppliers.
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As procurement teams struggle to cope with the Covid-19 global pandemic, most have been trying to keep up with the news about global response measures and have been working diligently to secure raw materials and components and protect supply lines. However, vital information is often not available or accessible across their global teams. As a result, their response to the disruption has been reactive and uncoordinated, and the impact of the crisis is hitting many of their companies full force.
In contrast, a small minority of companies that invested in mapping their supply networks before the pandemic emerged better prepared. They have better visibility into the structure of their supply chains. Instead of scrambling at the last minute, they have a lot of information at their fingertips within minutes of a potential disruption. They know exactly which suppliers, sites, parts, and products are at risk, which allows them to put themselves first in line to secure constrained inventory and capacity at alternate sites.
Despite numerous supply-chain upheavals inflicted by disasters in the last decade — including the eruption of a volcano in Iceland, the Japanese earthquake and tsunami, Thailand floods, and Hurricanes Maria and Harvey — most companies still found themselves unprepared for the Covid-19 pandemic. Seventy percent of 300 respondents to a survey conducted by Resilinc in late January and early February, immediately following the Covid-19 outbreak in China, said they were still in data collection and assessment mode, manually trying to identify which of their suppliers had a site in the specific locked-down regions of China. There are a number of reasons for this problem — and potential solutions.
The required resources for supply network mapping are expensive.
Many companies and leaders talk about the need to do supply network mapping as a risk-mitigation strategy, but they have not done so because of the perceived large amount of labor and time required. Executives of a Japanese semiconductor manufacturer told us that it took a team of 100 people more than a year to map the company’s supply networks deep into the sub-tiers following the earthquake and tsunami in 2011. This explains why most companies are like a major South Korean consumer goods company, which recently told us it had known that it should have mapped its supply networks but has not done so because of the difficulties involved.
Consequently, many companies continue to rely on human intelligence from top-tier and a select few lower-tier suppliers. But the information collected via personal relationships is typically anecdotal and often mere conjecture, and when procurement personnel leave, change roles, or retire, their knowledge leaves with them. It can take new employees years to get to know immediate suppliers, let alone the suppliers’ suppliers and their global footprint.
Yes, supply network mapping can be resource intensive and difficult. However, there is no way around it. Companies will discover the value of the map is greater than the cost and time to develop it.
The most common approach is to use the bill of materials and focus on key components. It typically starts with the top five products by revenue and goes down to their component suppliers, and their suppliers, ideally, all the way down to raw materials suppliers. The goal should be to go down as many tiers as possible, because there may be hidden critical suppliers the buying firm is not aware of. The map should also include information about which activities a primary site performs, the alternate sites the supplier has that could perform the same activity, and how long it would take the supplier to begin shipping from the alternate site.
A new breed of services companies can help acquire and analyze supply network data and organize the results in a user-friendly way. Their services typically do not map the supply networks all the way down to raw materials, but they may provide a start. A few of the companies operating in this space include Elementum, Llamasoft, and Resilinc. (Disclosure: One of us, Bindiya Vakil, is the founder and CEO of Resilinc.)
The procurement function is measured by cost savings, not revenue-assurance.
Most of procurement’s activities are centered around cost savings, which means obtaining supplies at the lowest cost possible, provided they fall within specified quality parameters.
When the procurement function has to resort to extraordinary measures to secure supplies on time (e.g., by expediting shipments or purchasing parts or materials at a premium), the higher costs are assigned to other parts of the organization (the logistics function in the case of expedited shipments, and the finance function in the case in the case of premium prices for raw materials and parts). Often, no one asks: Why was expediting or paying a premium necessary in the first place?
People from procurement, logistics, and supply-chain financing need to come together to talk about what key gaps (tools, information, people, processes, etc.) need to be fixed to protect the company from disruptive events in the future and how to align the goals of procurement with the overall business objectives.
Supply chain disruption is often not part of supplier performance metrics.
When a disaster strikes, everyone suffers: buyers and suppliers alike. Therefore, it only makes sense that firms should incorporate disruption-related metrics in their evaluations of suppliers.
For example, when selecting a supplier and writing the initial contract, many leading companies include language that requires the supplier to participate annually in its supply-chain mapping efforts. When force majeure events like the current pandemic strike, those supply maps can be used as a roadmap to solutions to the crisis. (Suppliers in China made more than 3,000 force majeure declarations during the first few months of the Covid-19 crisis.) Contracts should also spell out expected recovery times and methods during such events.
After the Covid-19 crisis dissipates, we will see companies fall into one of two categories. There will be those that don’t do anything, hoping such a disruption won’t ever happen again. These companies will be taking a highly risky gamble. And there will be firms that heed the lessons of this crisis and make investments in mapping their supply networks so they do not have to operate blind when the next crisis strikes and rewrite their contracts so they can quickly figure out solutions when disruptions occur. These companies will be the winners in the long term.
