For most companies corona came out of nowhere and was an unprecedented shock. At first far away, it started in China, then suddenly appeared in Italy, and after that spread across Europe and the entire globe. Soon it became clear that there would be a potential impact on entire value chains, which have been built up over the last 25 years in the drive for globalization. How buyers coped with the new challenge, and which measures Kloepfel Consulting advised, tells us Dr. Stephan Hofstetter, Partner and Head of the Kloepfel Academy.
Taking Responsibility: The Right Advise at the Right Time
As supply chain consultancy, we realized soon that, with Corona beginning affecting Procurement in many companies in Germany, Austria and Switzerland, it was the time for help and expertise for those in need. Our way of contributing to dealing with the crisis was to immediately promote an online academy with free-of-charge webinars to support our current and prospective clients with valuable advice. In these, we provided perspectives and tools to analyze and handle Corona and its effects:
- Corona exit strategies
- Rethinking the future after Corona
Immediate Measures and Remote Consulting
What did we and our client base exactly do as an immediate reaction to the crisis? Leaders in our client base have early set-up a taskforce to manage potential and upcoming interruptions in the supply chain. They also established rigorous transparency on the value chain to identify potentially vulnerable bottlenecks and set up a direct communication-line with suppliers, the latter being a top-priority in this situation.
It also became clear that not all companies were well prepared regarding contact lines and contact details, e.g. to adapt payment terms or simply to enhance communication. Also, it was critical to control and to restrict spending for non-priority purposes. Transportation restrictions and capacity became immediately issues to be resolved. For a multinational client we were talking to 60 vendors to understand the value chain, to create transparency and to optimize lead time.
Developing Scenarios to Plan Ahead
While our clients implemented the necessary measures, it became more and more evident that the Corona Crisis might last for months, and that there might be a second wave, as in all other pandemics in the past. Consecutively the question was: How to prepare for the upcoming months in a crisis when you cannot be exactly sure how it will look like? Our recommended approach was to think in scenarios enabling a meaningful perspective in the communication with the supplier base.
Crisis-Scenario Building and Updating
Developing such scenarios for a specific company or industry, we started by asking for the two most critical drivers of the crisis: Is it the demand? Issues in the supply chain? Employees which are in quarantine, the financials, lack of transportation capacity, or issue with health concepts in operations? Based on the answer we developed scenarios of recovering from the Covid-19 crisis based on assumptions for the two most critical drivers. In the basic scenario, finally we derived the forecast for 2020 and a high-level business plan for 2021, in comparison with 2019. Since suppliers are very keen to get some direction in uncertain times, this was essential to establish a common planning ground. Of course, a scenario is based on assumptions – which means they may change and may have to be reviewed.
Learnings in Protecting the Value Chain from Impact
Understanding at which point a value chain could fail in crisis is crucial to identify potential breakdowns of supply and production. To analyze this, we established a health check with our clients. As part of this approach, we tried to understand the specific Corona impact in all supplier meetings, facilitating an update of the risk-assessment of our clients. We took three learnings from this:
- The risk exposure is related to the specific customer structure and the sectors of their accounts such as automotive
- Experienced interruptions were and are closely related to Corona Hot-Spots with an officially regulated lock down, effecting mostly European value chains with vendors in Italy, in Spain, in Germany, and by far less in Asia
- Supply chains of European champions are still set-up more national and regional (Europe) than global.
For a large client we supported a strategic efficiency program to drive performance in close collaboration with suppliers, we were talking to 280 vendors to master jointly short-term Corona challenges, to prepare for most intensive competitions in relevant global markets, and to design the future after Corona.
For the future after Corona in Procurement there are a few strategic directions top-of-mind.
How to Achieve Resilience
Resilience of value chains became a key word in the Corona Crisis. How can it be achieved? First step is to reevaluate the geographic network of global value chains. The general idea here is to have the suppliers closer located to the production with the goal to strengthen regional value chains with a relative proximity to end customer markets. This means regionalizing within Europe, America or Asia might continue to grow the trade among neighbor countries.
Domestic supply chains already become more relevant in emerging countries, like China, since they consume more and more what they produce. In addition, trade based on labor-costs arbitrage might decline. Proximity to customers, quality of infrastructure and access to skilled labor tend to be more important criteria. Another opportunity not to be ignored is automation.
Multiple Sourcing Strategies and Moving Value Chains
Single sources are an avoidable risk, so building in redundancy with dual to multiple sourcing strategies should be a priority, and in combination with a closer supplier integration as a solid foundation for a lasting relationship. Regarding reshoring, it is observable that value chains have always moved and will continue to move. This means, they could relocate across borders, according to a McKinsey estimation even up to 15 to 26% in 3 to 5 years. It is not a forecast, just a realistic few on a strategic option.
It is also imperative to push for a radical transparency in the value chains from raw material to end customers. This pursues two goals: First, leadership in the risk-management to identify critical potential bottlenecks, far in advance to any incidence. Second, taking up on the upcoming challenge of insolvency in the next 6 months when governmental programs will elapse, and company struggle with the second wave.
Further Challenges ahead
There are other factors that should not be underestimated. Sustainability is one of them. This trend is up to become a competitive advantage in the perception of consumers and investors. Non-sustainable activities will be most critical in the future, not just for the reputation risk.
Corona has obviously accelerated the diffusion of cloud solutions and digitalization in Procurement. Clients are reconsidering their digitalization roadmap with the idea to accelerate implementation. There is still a huge cap between the perceived value and importance of digital applications and what has been implemented in the last few years. Implementation was progressing rather slowly. Covid-19 might be an opportunity to find a faster track.
Supply chain management is a material C-level topic for which management should drive initiatives and take larger stake of responsibility.
Kloepfel Consulting GmbH
Gerrit M. Schneider
T: +49 211 / 882 594 17