Supply relationships in a new world

Customers will ‘more closely review their suppliers’ financial health and diversification’ as a result of the coronavirus experience. That’s one of the findings in a PwC survey of Chief Financial Officers, conducted April 6th-8th.

PwC also discovered that immediate supply chain focus has diminished in the last few weeks, though broader concerns over procurement risk management remain high on the agenda.

IACCM’s research has similarly indicated that there is extensive thought being given to the question of future supply chains – their robustness, sustainability, underlying economics. Many recognize that the current model of supply chain consolidation, just in time delivery and maximized risk transfer is a thing of the past, but they are far from clear about what the future may look like.

The pandemic will inevitably result in some suppliers going out of business and others merging or being acquired. So while CFOs may decide they want to diversify their supply base, they may find there is considerably less ability to do so. Equally, they may discover that suppliers are also going to be more selective about who they want as a customer.

Financial health and diversification goes two ways – and as a supplier, I would certainly be wanting to review how customers and prospects behaved during the coronavirus crisis.

As IACCM’s studies have also shown, there will be interesting reviews of current ‘make versus buy’ decisions, as well as efforts to diversify supply options.

Perhaps one of the most interesting aspects of the new world will be in areas of collaboration. Clearly, one option is for businesses to ‘hunker down’ and take a narrow, inward looking, view of risk. That is unlikely to work and there are far better, more expansive alternatives.

For example, we anticipate more thought about development of resilient supply ecosystems, rather than simple supply chains. The need for increased access and transparency is one thing that the pandemic has made more urgent and networks or ecosystems are far more effective at delivering these attributes.

We are also observing how suppliers are looking to increased cooperation, both vertical and horizontal. The relaxation of competition controls and, in some cases, direct encouragement by governments of joint-working may be here to stay. Already, there are signs that new collaborative ventures could form to reduce the exposure to shortages and to develop affordable and efficient availability models.

Much of this thinking is not new. Many executives have been aware for some time of the need for change in how risk is viewed and managed.

They have recognised that the way their more important supply relationships are structured does not yield the best results. But making a significant change risks disruption.

For example, if procurement strategies shift to a focus on outcomes and life-time value, what short-term impact might that have on costs and profitability? In markets where performance is based on quarterly earnings statements, changes like this are too unpredictable, so they don’t happen. But now, there is not only a need, but also a clear opening.

Over the next year, it is inevitable that financial results for most corporations will look bad relative to the past – so this is surely an opportunity for more fundamental change. Let’s hope it happens!

This article was originally published in the Commitment Matters blog, 24 April 2020 – https://commitmentmatters.com

Tim Cummins is Chair of the International Association for Commercial & Contract Management (IACCM).