The Covid-19 pandemic is putting huge pressure on global supply chains. Now, with a recession looming, supply chain leaders need to act quickly to face the mounting disruption, according to consulting firm GEP. The New Jersey-based firm has deep experience providing procurement and supply chain strategy, software, and managed services to Fortune 500s and other enterprises.
“The key is not to make matters worse by solving short-term supply chain issues but ignoring initiatives to improve cash flow to strengthen their company, because the light at the end of the tunnel is an oncoming train,” said John Piatek, VP, GEP Consulting, CPG and Retail.
According to the firm, there are three things procurement and supply chain leaders should do now to combat the massive challenges presented by the Covid-19 outbreak.
Cut costs and secure more cash
Supply chains typically account for 50%-80% of global manufacturers’ cost structure. Costs will rise as manufacturers are forced to expedite shipping and pay overtime to try to meet commitments. GEP says leaders have to improve cash flow and boost working capital, enabling future financial flexibility.
They can achieve this by lengthening payment terms on non-essential items, postponing capital purchases, cutting down on business “wants” versus “needs,” and discontinuing low-running SKUs.
“We find that while most companies are simply scrambling to maintain normalcy as they manage this crisis, they are incurring additional costs to maintain supply and are failing behind in initiatives to drive efficiencies and cut costs, in order to prepare for the coming economic downturn,” Piatek said.
Accelerate supply chain agility
Leaders need to diversify supply chains across geographies to avoid a total loss of supply in the future. Major companies in nearly every industry have accelerated plans to shift part of their supply from China, for example. However, GEP says these shifts take time, so steps have to be taken now to build more agile supply partnerships for the future.
Prioritize sustainable and structural cost advantage
Draconian cost reduction measures give short-term results, but aren’t sustainable. Structural cost advantages can be created by augmenting the source-to-pay (S2P) process – which spans the entire procurement process, from spend management to purchasing to accounts payable – with budget-to-pay (B2P). This modification allows procurement and finance to check every request for budget availability prior to committing spend to external suppliers. This enables firms to more aggressively drive cost control and financial discipline, according to GEP.