Disasters have a way of elevating procurement operations to saviors of the day, week or month. But once a crisis has passed, purchasing reverts back to its identity as a corporate cost center.
Covid-19 could strengthen purchasing’s position as a corporate risk-management resource. The pandemic has raised the supply chain to a topic of national discussion, said Chris Sawchuk, principal and global procurement advisory practice leader for The Hackett Group, and not all reviews`were good. “If I were to be asked the question what would I have done differently, the answer is ‘I would have been prepared.’”
The global epidemic has exposed multiple vulnerabilities across supply networks, said panelists on the Art of Procurement (AOP) Live: 2021: Post-Crisis Procurement webinar. The financial impact of not fulfilling orders or meeting commitments has the attention of the C suite. Idle manufacturing lines reduce factory productivity by as much as 20 percent, according to Oden Technologies, representing millions of dollars. Factory shutdowns and workforce quarantines have impaired production, delayed orders, stalled shipments and bankrupted small companies.
“Priorities have shifted,” said Sawchuk. “When you start to understand the impact that supply and the supply chain have on the profitability and success of companies, there is significant opportunity there.” Risk hasn’t historically been a top 10 concern of chief procurement officers (CPOs), he added. In a recent survey, risk is now among the top five.
Hackett just completed a Q2 update on 850 companies’ working capital. Overall, Hackett found a 14 percent decline in revenue from Q2 2019, and decreases in gross margin, EBIT margin, and net income margin. Debt levels increased by 13 percent and cash on hand increased by 47 percent. Most companies are paying suppliers more slowly, and days payable outstanding (DPO) hit a 10-year high, 60 days versus 54.7 days.
Investment in supply chain digitization is viewed as a “nice to have” enhancement rather than a critical necessity, said Vishal Patel, vice president of product marketing at Ivalua, a procurement-software provider. Automating manual tasks such as paperwork has already benefited enterprises during the pandemic. In the public sector, he explained, suppliers are required to fill out paperwork for bids and physically drop documents in the mailbox of a public entity. That’s not practical during the pandemic. Ivalua was able to automate that task within weeks.
The pandemic has accelerated investment in digital tools and platforms that enhance planning, automate tasks and extend visibility in the supply chain. Companies already in the process of transition were better prepared than their peers, said Patel.
The cost of digital transformation is still a concern in upper management, panelists agreed, but all have seen signs of progress. “As of June, we had seen an acceleration in investment,” said Patel. Risk has been elevated on the agenda of not only procurement executives but across companies as well, said Sawchuk.
The biggest complaint within enterprises is a lack of visibility into extended supply chains. At the macro level, this includes tracking vendor shipments and delivery information — the coronavirus has delayed both. For resiliency, companies need to look beyond their first-tier suppliers into tier-two and tier-three. In electronics, a materials company could miss a delivery to a foundry, which in turn delays component shipments to equipment manufacturers.
“Once you are in the crisis you are not going to get that visibility,” said Sawchuk. “It’s the age-old problem of ‘what do I need to invest in to prepare for these risks?’” Panelists pointed out supply chain improvements rarely show an ROI unless a disaster occurs.
The pandemic is not yet in the rear-view mirror. Business revenue has so far declined in 2020. As the pandemic takes a toll on sales, organizations need to consider rationalizing their manufacturing and distribution footprint; structurally changing manufacturing operations; defining alternative distribution channels; standardizing production capabilities, and optimizing the end-to-end supply chain across the manufacturing, logistics, distribution, supply and customer bases, according to a Hackett Group study.
Strong business cases can be made for digital transformation even without a pandemic. Automation improves efficiency. Visibility can enable supply chain diversity and provide early warnings of disruption. Planning can be done based on data, and forecasts can be analyzed for patterns. Covid-19 has been the ultimate stress test on the supply chain, Sawchuk said.”This isn’t about one company or a couple of companies; this impacts all of us. This is a cost of doing business.”