Coronavirus and supplier management – ​​part 2

After the impact of the first weeks of the pandemic caused by the new coronavirus, many companies are concerned that:

1. Are dependent on products, parts or inputs from China;
2. They are extremely dependent on a single supplier, regardless of their location;
3. They have a large part of their suppliers or production in a single location (city/region/country).

In the first post I made on the topic (“Coronavirus and supplier management”), I mentioned that a good purchasing and supply strategy includes, among other steps, the classification of products and inputs according to “Purchased Value” and “Supply Risk”.

The “Value Purchased” dimension was most often more important than the “Supply Risk”. This happened because for a long time the decision to concentrate the purchase of inputs or global production on a few suppliers around the planet made sense in view of the financial gain. Having more competitive costs was the main factor in decision making, although other points such as product quality and supplier reliability also entered the decision matrix.

Figure 1: More developed companies in their management consider “risk exposure” when evaluating their suppliers. Source: Michael Shannon on Unsplash

Companies with a more developed and sophisticated purchasing strategy already include “risk exposure” as a dimension in the evaluation of their suppliers. And this topic ranges from the analysis of the probability of natural disasters or wars to trade restrictions between countries. Apple was one of the companies that is aware of the risk of a possible trade war between China and the USA, intends to transfer part of its production out of Chinese territory.

I do not believe that post-COVID 19 globalization will end or reduce to very low levels. It seems unreasonable for countries to bring back a good part of the production lines that were outsourced in the last two decades. I also don't believe that the price factor will lose importance when selecting a supplier, but other parameters will gain relevance.

Questions such as, “What is the risk of a certain supplier?”, “Who are my suppliers' suppliers?”, “Should the company concentrate purchases on just one supplier? Or just in one region?”, “How quickly can a supplier increase or decrease production capacity?” among others, will become part of the purchasing and supply strategy of many companies.

These questions corroborate the opinion of some specialists, who already believe that supply chain executives will have to consider the 3Rs in your strategic planning: resilience, responsiveness and reconfigurability.

It is not yet clear how global chains will be structured in the post-COVID-19 world, however it is easy to assume that these new dimensions of supplier evaluation will become part of the daily lives of purchasing professionals. On the other hand, with the pandemic, the importance of supply chain diversification, risk assessments and the need to have a contingency plan ready to be used immediately in order to minimize the damage caused by unexpected events.

I end with the same question: is your company prepared? ILOS offers training on “Strategic Supply Management"and "Procurement Processes".