A study released by the Institute for Supply Management found that 81% of U.S. companies expect their procurement operations to be affected by COVID-19.
After more than a year dealing with Supply Chain interruptions, now organisations will confront the Inflation that is coming, to be prepared and confront these changes, I want to highlight 5 steps to follow and avoid enormous affects.
Step No.1 – Create a Risk Assessment.
Start with a thorough analysis in your supply base, understand all the information that you have, spend, critical suppliers, their locations, dual sources, alternant materials, and KPI’s based in the information, you can start doing a Risk Assessment, use your 20% of suppliers covering your 80% spend, assign some weights and percentages and do a matrix, assign the risk that you identified, based in past situations having late delays, bankruptcy situations, or quality issues.
Once you have the assessment, now develop an action plan to develop dual sources, identifying alternant material or suppliers. Start doing validations with your operational team so you have a Plan B.
Step No.2 - Negotiations
Once you have identified your critical supplier, work with them, check the current Agreements that you have and negotiate better terms, including performance, because suppliers in these days are always saying a COVID situation caused the delay, is this true? Have you asked enough questions to understand what generated the delay? Ask what you want, and you will get it.
Price increases are everywhere because of the situation, higher freights, raw materials, etc, because of this is a tendency, there are some suppliers that are using this trend for pass increases and benefit their companies, ask the right questions in the negotiation, proof of increases should be presented if they want to continue building a relationship.
Step No.3 – Quotes
Now is time to make your suppliers compete, is time to do packages of RFP’s including all the materials that had an impact in your product, make supplier aware of the process and you will have power to negotiate discounts without even starting the process.
Always is healthy to check pricing in the market, so this is the perfect time to do this exercise. After finding the average pricing, you can go back to your current supplier and ask for a price reduction, if they are not able, that means that they are not competitive, and it’s time to move with new suppliers.
Step No.4 – Net Terms
Cash Flow in the organisation is key these days, you can check what are your net terms with your suppliers and based on the good history of payment you can ask for a temporal relief of your terms due to COVID situation, if they use COVID as an excuse for late shipments, why we won’t use it in our favour.
If you can negotiate paying your suppliers in 60 days, and if you get payment from your customers within 45 days, your cash flow will increase significantly.
Step No. 5- Streamline your supply
Avoid using distributor or brokers, try to change your purchasing direct, in this way you can cut those extra costs, you were not considering. Is good to consolidate suppliers thru distribution, but in crisis, that approach is not the best way to continue, as everything is changing also the supplier’s selection process should be reviewed.
These small steps can help your Supply Chain survive COVID and be proactive, before things get worse.
About the Autor
Irasema Calvo is a Sr. Supply Chain Manager Consultant