Jaggaer: COVID-19 - How to preserve cash in times of crisis
Cash is king once again. When a crisis hits, every organization needs cash on hand to hedge against financial and economic uncertainty, address unexpected expenses, and keep the business running. It’s foundational to corporate survival.
The coronavirus outbreak is the latest ‘black swan’ event to highlight this lesson, which has been taught and re-taught many times before. There are several ways procurement leaders can optimize spend management and sourcing practices right now to handle ongoing pandemic impacts and position the business to navigate future shifts.
- Pinpoint where money is being spent.
Get real insight into the spend within each of your products and services. At the component level, what drives the price of the product? What impacts quality? What about its delivery? What drives suppliers’ costs and how does that impact overall spend on the product or service?
An intimate understanding of these costs and relationships helps teams manage spending more effectively. The visibility helps realign budgets to where spend is going, understand how much budget should be allocated to each category, and reconstruct the playing field as new spend categories arise. It’s also the first step to leveraging your buying power. If you uncover 50% of what you’re buying is based on one commodity, you can bring larger orders to fewer suppliers, and increase competition for your business, securing a better rate.
2. Rule out maverick spend and identify new savings opportunities.
There are quick ways to save everywhere in the purchasing value chain -- you just need to know where to look. Off-contract spend is the most urgent to address, especially in times of uncertainty, because it hurts supplier relationships, forfeits discounts from preferred suppliers, and wreaks havoc on a company’s bottom line. Maverick spend often occurs because employees don’t know a pre-negotiated price exists, or because procurement processes are too complex. Clearly communicate these relationships, enforce catalog shopping, and ensure people know where to go for negotiated pricing information.
Next, get creative and think beyond the status quo. Look at inventory. Are there items that won’t move, or have aged to the point they can’t be used? Can you sell these items elsewhere? What about pushing spend to virtual cards to control expenses, secure rebates, and reduce the risk of fraud? Thinking in this way delivers some of the biggest and most immediate savings impacts – and should be engrained into regular procurement activity, not just during a crisis.
3. Collaboratively renegotiate rates and contract details with vendors.
The only ‘bad’ question during a negotiation is the one that doesn’t get asked. A rule of thumb: everything has value in negotiations, and everything is negotiable. Figure out what matters most to the supplier – it’s not always price -- and use that insight to reach a win-win arrangement for both parties.
A supplier may give you a discount if it means they get paid earlier. Offering better managed inventory, reducing their risk of engagement with multi-year contracts, or promising deeper forecast visibility can all be enticing supplier incentives and strengthen long-term relationships with critical suppliers. Negotiations are critical to reaching liquidity goals, so come armed with data and a clear understanding of both your and your supplier’s position. And always keep it collaborative – while margin reduction mandates may provide some immediate relief, it’s a poor business practice that risks creating new problems down the road.
4. Always think about ‘what if’ and plan for the future -- the best you can.
The coronavirus pandemic is a reminder that we can’t always anticipate where disruptions will come from. Many supply chain risks hit suddenly and hard with little to no warning. Proactive ‘what if’ thinking is the best way to prepare for these surprises. That same thinking applies to savings.
Model various sourcing scenarios – across all different combinations of revenue, budget, spend, and more – and understand how those risk events would impact the P&L and suppliers. If you’re consuming the same material as bicycle manufacturers, and indoor bike sales are picking up, how does that impact your supply sources? Watch what’s going on in the world and consider how events could impact your business. With the economic volatility expected to last well into 2021, now is the time to understand your risk tolerance for future events.
Similarly, engage with your suppliers to find a solution. When sourcing strategic categories, focus on the outcome, not the path, and consider all options. When given the chance, most partners will put options on the table you weren’t even considering. The typical result is bottom-line gains for both parties.
Projecting and weighing different scenarios, approaches and outcomes is critical – for procurement, and in life. As a new grandfather, I was happy to share this lesson with my daughter as they navigate the many joys and challenges of new parenthood. As I shared, there are countless ways to do it right. There is never a single solution, despite what the experts say. You need to find the path that works best for you, your partner and loved ones. It’s just like building collaborate supplier relationships… okay, not exactly, but the lesson holds true.
Times of crisis bring many challenges, but also opportunity. As I tell the kids I coach, hard work pays off. Although the steps above may seem daunting, saving money now will put the business in a better position to navigate ongoing pandemic impacts and handle whatever future crisis awaits. We’re only in the second or third quarter of this pandemic. We have to stay in the moment and play the long game. It’s procurement’s time to shine and deliver.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”