One of the most publicised and immediate impacts of the global COVID-19 pandemic was, and still is, the impact on supply chains. Everything impacted supply chains - from the restrictions being placed on the movement of people and the ways in which goods could be transported, to the human impact of the virus that meant it became more challenging to produce goods and deliver services.
These short-term impacts, or supply chain shocks, required ingenuity and resilience to resolve; to ensure that global supply chains functioned sufficiently well to support communities and commerce. This has led to very rapid changes in the way that suppliers are managed, coupled with a repurposing of existing management tools and practices to align with the new stresses and strains placed upon people, companies and interconnected supply chains.
Sustainable procurement, or responsible sourcing, was increasingly coming to the fore in the years prior to the pandemic. How organisations align their purchasing practices with their overarching corporate sustainability goals is a key factor in a meaningful sustainability programme. The pandemic has shone a light on the relationship between strong sustainability performance and resilience, and it is with this in mind that we see the opportunities to ‘build back greener’ touted across large parts of the economy. It is clear that more responsible and sustainable supply chains will be key to achieving the goal of building back better.
In this article we look at what the short-term impacts of COVID-19 have been on supply chains, how we have seen supplier management practices pivot to face these challenges and what the longer-term outlook might be and what opportunities this represents.
Short term impacts of COVID-19 on supply chain management practices
Supply and demand
According to McKinsey, 73% of executives said they had encountered problems in their supply base as a result of COVID-19. The immediate and most obvious impact of COVID-19 on these supply chains was that of supply. There were clear increases in demand on certain products due to consumer concern about supply. This exacerbated real issues that were arising throughout the supply chain and leading to actual supply stress, resulting in a positive feedback loop that deepened the problem.
Some issues that contributed to constricted supply were related to confusion and a lack of understanding of the virus itself. Meaning that cross-border flows of goods stalled due to safety precautions needing to be understood and then implemented, and local ‘lockdown’ regulations needing to be understood in relation to trade, before the flow of goods from origin could continue.
The above example can clearly be applied to food supply chains. However, COVID-19 impacts extend beyond just food and have the potential to impact the supply of any type of physical good, which in turn can affect all business sectors including our clients across professional and financial services. This is borne out by the fact that 94% of Fortune 1000 companies are seeing coronavirus supply chain disruptions.
The interconnectedness of supply chains, whilst proving a blessing in the modern world, were very quickly shown to be a weakness if they were not fully understood by the actors throughout them.
Similarly, applicable across all sectors was the importance of supplier resilience. This relates to multiple aspects of a supplier’s business, ranging from financial stability and governance to the type of service or good they supply, and where that is itself created and delivered. This is why the link between good sustainability, or ESG performance, and resilience has been made.
Sustainability, or ESG, covers a wide range of performance metrics across environmental, social and governance, and it appears that this has been an effective determinant of business resilience in the pandemic.
Therefore, the greater the visibility of this type of indicator across your supply chain, and the more sustainable your own practices in relation to managing supplier relationships, the greater protection you have for your own operations.
Behaviour change in supplier and supply change management
As already mentioned, resolving immediate supply chain shocks has required ingenuity. For example, we have seen clients placing their own employees into supplier businesses to ensure continued production at their required levels. However, it has also involved the extension and embedding of responsible supply chain practices that have been evolving over recent years.
If good ESG performance can increase the resilience of your suppliers, then procurement practices which promote the selection and management of suppliers based on these principles and engender collaborative relationships with these suppliers, can only reduce the risk to your own organisation.
We have seen first hand a number changes in how companies are managing their suppliers, and how the emphasis has shifted to more sustainable approaches. The biggest enabler of the key themes that follow, is digitisation. Without the ever-increasing shift towards digital and online methods of supplier management, the coverage and currency of data required to make informed decisions would not be possible.
The importance of supplier diversification
A key focus for organisations is to carry out some form of supply chain mapping. This helps to provide transparency across the supplier base, ensuring that organisations simply understand who their suppliers are and where their goods and services are coming from. The greater the visibility that can be achieved across the tiers of the supply chain the greater the potential there is to de-risk.
The aim of this enhanced visibility across the supply chain is threefold. It is to identify any vulnerabilities or risks in the supply chain, to enable appropriate supplier diversification and to improve individual and overall supplier performance.
Vulnerabilities could result from single sources of supply with no viable or geographical alternatives. This vulnerability may need to be addressed with that the supplier through changed contractual terms or through on the ground collaboration to enhance resilience.
However, in other instances there is clear opportunity to implement dual-supply, whereby multiple suppliers provide the same service, providing resilience in times of stress. This is the antithesis of the trend towards lean supply chains and maximising cost savings and time efficiencies. However, in the world of digitisation it is becoming increasingly possible to strike a balance between resilience and efficiency.
Increased supplier engagement
The other large shift in supplier management we have seen as a result of COVID-19 is in relation to both the way in which suppliers are assessed and the way in which they are continually engaged with. The breadth of assessment has evolved from perceived business critical requirements such insurance documentation and information security, to become more holistic. Labour practices, sustainability programmes, environmental targets and emissions are covered in both qualification assessments and ongoing management indicators for suppliers.
In some instances, suppliers are being engaged specifically on the practices they have put in place to deal with COVID-19 impacts right now, for example how they ensure continued supply from their suppliers and protect their workers. Similarly, it is important to understand how their business has prepared for the future, for example with a reduced set of products and services or a more agile approach to demand.
There is also a greater focus now on continued engagement with these suppliers, and in many ways successful engagement is the essence of a successful responsible sourcing programme. Responsive and sustainable supplier relationships are increasingly based on a collaborative approach to tackling global challenges such as climate change and slavery. COVID-19 has, however, highlighted whether organisations have the correct processes in place for engaging with suppliers quickly in order to address external shocks.
Some organisations have not got to grips with managing supplier risk throughout their relationships with suppliers and instead only provide a limited form of pre-qualification assessment which provides no insight into ongoing risk. Others are much more advanced and have risk management programmes that are dynamic and ensure consistent assessments and remedial activities take place.
However, even this is now viewed as limited in effectiveness in a post-COVID world, the dial should be moved from ‘preventing bad’, to ‘doing good’. It is only through this lens that collaboration and equal partnership is brought to the fore to drive change.
Long term impacts of COVID-19 - supply chain opportunities
It seems then that COVID-19 has brought about significant changes in relation to supply chains and how they are managed, more than we can begin to speak about here. Sustainability has come to the fore and suppliers and entire supply chains need to be more resilient than ever before. However, as is often the case with seismic events, it is not so much that dramatic change has taken place, but instead, what was good has served us well and what was bad has failed us.
It is with this in mind that we have the opportunity to build back better. According to McKinsey, 93% of executives plan to increase supply chain resilience. The digitalisation of supply chains will therefore further increase, with organisations who cannot be flexible and responsive left behind. We may also see more of an emphasis on security of supply rather than speed and lowest possible cost. Something that could well provide knock on benefits to the environment as consumer expectations are realigned.
We will see the importance of sustainability as an indicator of resilience increase, and with supplier management processes being a key element of ‘good’ sustainability we will see more focus on procurement’s ability to deliver this. According to Gartner, 51% of supply chain professionals expect that the focus on circular economy strategies will increase over the next two years. So we can expect even more emphasis on collaborative and sustainable approaches to supplier relationships, which will facilitate organisations journeys to goals such as net-zero and zero-waste.
Despite the increased equality in the buyer-supplier relationship, there will still be the need for many organisation’s to create more robust risk management procedures through continued assessment, evaluation, audit and improvement plans.
In the short to medium term suppliers should expect to have to satisfy information requests from more of their customers. However, in the medium to longer term with increases in standardisation of sustainability reporting frameworks and increasingly homogenous risk databases and metrics, demonstrating resilience and good practices should become more streamlined.
COVID-19 has been a global struggle. It has highlighted the need for stronger and more responsive relationships between suppliers and buyers. It has highlighted that, with external shocks of this scale, a collaborative approach is the only way to find a resolution. There will be more external shocks in relation to resource depletion, economic downturns and climate change to name but a few. Hopefully we will be in a position to both avoid and address these with more sustainable supply chains as a result of the COVID-19 pandemic.