The coronavirus outbreak is having a profound impact on every business’ supply chain. The U.S. manufacturing PMI indicated the worst contraction in production, new orders, and employment since the 2008 recession. Nearly 75% of companies report supply chain disruptions in March, a number most expect to rise further.
Most organizations are looking to cut costs and optimize cash flow to combat the economic uncertainty. The performance of the procurement function – which owns supplier relationships and holds the purse strings together with the CFO – is critical for effective cash management during and after the crisis.
There’s a fine line between optimal prices for effective cash management, risk management, and security of supply. Every procurement leader has an opportunity to respond to today’s crisis with smart and programmatic spend management practices that position their company for success. There are several actions procurement and sourcing teams can take today.
Promote and enforce cost discipline across the enterprise.
Every spending decision should be made with heightened consideration, which requires strict approval processes that can be adapted to meet changing market conditions. For smaller organizations, that might mean running every purchase by the CFO to reduce maverick and non-essential spend. For larger organizations, implementing a “no P.O., no invoice” rule across the organization and with partners, and blocking certain non-essential spend categories, are simple, yet highly effective strategies to tighten cost controls.
Procurement leaders must be clear on expectations. Creating and issuing a guide to buying during the crisis can help align requisitioning departments and other teams on new and interim best practices, cutting down on undesirable spending practices. Communicate the new reality to suppliers so they can follow the plan accordingly.
Analyze spend in-depth and frequently.
Rigorous spend analytics is even more critical in times of crisis. Are there savings opportunities that were previously overlooked? Can the time-to-fill requisitions be improved, especially while everyone is working from home? Refresh spend data at least biweekly – and ideally weekly – so you have an accurate picture of how much you’re spending, and with which partners, and can course-correct where needed. This level of analysis helps create a clear view of spend with the most important suppliers, identify variances, track results of global and local savings initiatives and ensure strategic KPIs are being met.
The alternative - managing spend in email and spreadsheets - is a bottom-line killer. When spend analytics is fully automated, it creates new levels of visibility. It also reallocates time normally spent on backend processes to more value-generating tasks, like identifying new ways to save or assessing which suppliers are most at risk. Automation combined with predictive analytics and what-if modeling can show you the live impact of changes in your supplier network and the decisions you make.
Renegotiate pricing and contract terms.
Previously negotiated pricing and terms didn’t take into account the new reality. Over the next few weeks, check for force majeure clauses and understand how recovery times, methods and other conditions affect you. Then, revise it if necessary.
Taking key contracts out to bid can help ensure you’re getting the best price and terms possible. As market conditions change- and prices for certain products and commodities plunge, or skyrocket, as is the case with freight- strategic sourcing is essential for controlling spending and risk today and when the economy recovers.
Build “moats” around your business and drive agility with digitalization.
When demand and output are reduced, companies once ordering thousands of stock items could now be ordering just hundreds -- but the administrative overhead stays relatively even. Connecting with suppliers digitally and automating P2P processes such as invoices is essential for offsetting the workload, especially if headcount has been reduced due to furloughs or layoffs.
The bottom line: Procurement organizations that have prioritized digitalization and consistently centralized intelligence are the most agile. Digitalization enables procurement leaders to uncover where opportunities and risks lie more quickly and invest in and protect the relationships most valuable for the organization.
Most procurement functions were already investing in digitalization. With work from home the new normal, being digitally enabled and connected has never been more critical. Digitalization is directly tied to resilience -- procurement needs to be equipped to manage payments, source new suppliers and connect with partners anytime, anywhere.
The upside for procurement.
The procurement function plays a central role in keeping the business running in times of crisis. While respecting the gravity of today’s situation, there is an upside for procurement: it creates an opportunity to prove procurement’s value to the business. Companies that emerge from this adversity the strongest will be those that have been able to retain cash in the business while reducing risk – both of which are procurement’s forte.