The economy has shut, which doors should manufacturers open first post COVID
COVID-19 has shut down most of the world economy and manufacturers are faced with a wide choice of countermeasures to tackle it and options to move forward. Our Rapid COVID survey has shown that 88% find the inability to predict future scenarios as the key challenge from this crisis. There are genuine reasons to worry, for example, BCG is forecasting Automotive global sales decline of ~20% in 2020 with risk of sales declining as much as 40% in worst-case scenario.
COVID has also shown how agile and resilient manufacturers truly are. Across the UK, manufacturers including Babcock, Dyson, Airbus, Rolls-Royce and Ford have started producing ventilators within weeks of request. The same agility and sense of urgency will be necessary for manufacturers to adapt due to the uncertainties arising in a post COVID world.
Manufacturers have already started to respond to the situation, taking measures to manage their liquidity and navigate through the uncertainty by reducing operational costs, cutting non-essential investments, adjusting inventory, or implementing alternative sourcing options. This has meant adapting fast, even at the expense of certain golden rules. Up until the crisis inventory was often synonymous with waste, however, it is now synonymous with survival.
These procurement measures are critical, but more will be necessary for manufacturers to come out stronger after COVID.
Procurement in times of COVID
Procurement has a material role to play. In our recent Rapid COVID procurement survey, over 100 companies across sectors share their insights on the size of the impact as well as the challenges ahead:
- 69% of manufacturers expect revenues to drop by 10%
- 42% of businesses expect permanent changes to their supply chain
- 86% of respondents already report supplier bottlenecks and realise supply will have to be secured while cost has to be driven out rapidly
- 68% of respondents have addressed daily supplier operational risks via war rooms. Few have implemented cost-out or demand management solutions at scale yet, due to focus on short-term business continuity management needs
- More than 70% do not plan to support their suppliers financially or non -financially.
- Only 33% have renegotiated prices with suppliers and 30% are not planning to do so.
As manufacturers are now learning how to navigate through the crisis, there are measures procurement should realize to improve the bottom line and future proof supply chains– not only risk proofing it – to perform in uncertain environments.
Procurement are engaging with business and suppliers in four areas to endure COVID and future proof their supply chains
1. Improve commercialism and get ready to bounce back
Whilst businesses see their operations reducing in pace or even halted, they need to immediately implement procurement measures that improve commercial resilience:
- Delay and cancel non-critical events and projects not just for safety, but also cash-flow
- Immediately seek Indirect spend demand reduction measures e.g., review business and contractual needs for machinery maintenance, facilities management, waste management, contractors and office space
- Re-calibration of specifications and zero-base line design
- Lead collaborative discussions on long-term deals in exchange for beneficial terms whilst going through the crisis, especially with key suppliers
- Re-negotiate for raw materials or heavily raw material-based products e.g., oil, steel
2. Collaboration and innovation with key suppliers
Accelerating collaboration and innovation with key suppliers will be essential to develop solutions adapted to the new normal and create a competitive advantage. New supplier collaborations, alliances and ecosystems will emerge.
- Segment and identify the key suppliers that are critical to the operations and engage with them
- Work with key business partners to sponsor these collaborations, collectively assess best in class practices and identify improvement areas
- Manufacturers and suppliers have learnt to deal with the crisis, spend one day with suppliers with an open book approach. It will help understand changes in cost structure, norms and ways of work to align operations to be both, lean and risk ready
- Categorize bottlenecks in the complete value chain and practices that inflate supplier expenses; one way of doing it is to ask suppliers to assess the manufacturer as way to optimize total life cycle cost
- Use the current trading climate and new future demand forecasts to test new opportunities and leverage supplier innovations that can improve products, operations and processes
- Earlier involvement in new product design, deploying rapid proto-typing and agile approaches to accelerate new product and ways of working introduction
We have found in our survey with 185 procurement leaders that collaboration primarily occurs with operations and finance but is lower and falling in critical areas such as risk, supply chain, or manufacturing – all of which are necessary to build true collaboration with suppliers.
3. Procurement digitilisation and risk management as part of it
The digital transformation in procurement has been engaged. The advent of advanced analytics, big data and AI means tools can now predict better than human brains. This of course supports better risk management but also better overall decision making by enhancing areas such as spend analytics, contract management, innovation, sourcing and supplier management.
- Assess the procurement digital maturity and identify critical niche apps to augment core, ‘backbone’ infrastructure. For instance, manufacturers can look at what peers are doing, conduct surveys internally and with suppliers, and run workshops to close gaps.
- Create meaningful transparency where it lacks today and investigate the tools that are compatible with the existing digital infrastructure
- Embrace innovative solutions, for instance it could be cost tear down analytics coupled with commodity market insights to forecast costs
- Diagnose supply chain risks, flag bottlenecks down to Tier 3 suppliers to ensure the production line doesn’t stop
- Research for alternative sourcing options e.g., raw material sourcing in Europe
Across the whole organization, all categories and the whole procurement lifecycle digitalization will create a step-change for manufacturing companies.
4. Integrating Sustainability
One may think that now is not the time to invest in sustainability. We believe in the complete opposite and action is required now. By adopting the sustainability lens, organisations have improved their brand recognition, internal stakeholder support, decision making and cost. As supply chains are being re-shaped and localization of suppliers becomes a collateral consequence of the COVID crisis, businesses will need to promote supplier innovations to offset excess costs; often synonymous with more sustainability.
- Create supply chain transparency
- Define and share your sustainable purpose and goals. Differentiate between compliance, competition and leadership
- Identify and implement a sustainable procurement initiative portfolio. Maintain and accelerate ‘table stakes’ initiatives and create a ‘step-change’ through initiatives that differentiate you
- Create a sustainable supplier ecosystem
- Adopt a Total Cost of Ownership approach to evaluate sourcing solutions and embed sustainability as part of it. Engage with business partners in engineering, operations and sales to unlock innovation internally
- Create the sustainability KPIs and science-based reporting that will support the overall goals and decision making
Future state manufacturing procurement
Top performers in times of crisis also have vision and vitality, they stick to a clear purpose and vision. Even as they looked for new sources of growth, top performers pursued the clear purpose that they had before the crisis – and a vision that was based on a small number of long-term themes. They increase vitality. Defined as the ability to innovate, explore new ideas, and reinvent the corporate strategy in order to achieve sustainable long-term growth.
Fundamentally, procurement will also need to improve team capability, and further the digital ways of work that have been adopted through the lock down.
The intense focus and action deployed to flatten the curve and fight COVID will be a foundation for the future. Companies that act first to lock in and implement post-COVID transformation will emerge the strongest and most successful.
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