Resilience in supply chains
What began as a health scare in a single province in China morphed into a global pandemic that spread to almost every country in the world, putting much of the global population in partial or total lockdown. Border restrictions and lockdown measures caused massive negative short-term impact on consumer spending and investment and disruptions to international trade and global supply chains.
The long-term impact remains uncertain.
Isolation measures implemented globally to contain the outbreak affected economic activity, with a sharp deterioration in business and consumer confidence. With businesses closing and workers not working, there was a significant reduction in discretionary spending and investment.
Covid-19 unleashed a global supply chain crisis across a huge number of organisations, stemming from a lack of understanding and flexibility of the multiple layers of their global supply chains and a lack of diversification in their sourcing strategies.
Procurement functions were under incredible pressure to navigate this supply disruption while maintaining cashflow. Buyers were urged to cut costs by adopting short-term strategies and sometimes cancelled orders or lengthened payment terms.
Order cancellations translated into job losses and potential poverty to millions of low-income workers and their families.
For example, the Bangladesh Garment Manufacturers and Exporters Association reported (BGMEA, 14 April) 1,140 garment factories in Bangladesh receiving cancellations on 978 million units, worth over $3 billion, affecting 2.26 million workers.
The pandemic has taught us that businesses and buyers must think about the longer-term impacts of the decisions they make now in wider terms than their financial risk. Societal, humanitarian and sustainability risks should all factor.
Key steps to strengthening resilience within your supply chain
Gaining full visibility across your supply chain is an essential step. Do you know all of your suppliers and the challenges they are now facing, especially beyond tier-one?
Map your supply chain to identify any gaps in your sourcing strategies. Where you have a single source, is there an opportunity to mitigate the risk by dual- or multi-sourcing?
Businesses may already be working towards full supply chain transparency for ethical and sustainability purposes. This will give them an advantage during the Covid-19 crisis.
Based on criticality to your core business, evaluate whether suppliers are essential to short-term objectives or long-term competitive advantage. Are they easily replaceable?
As part of this prioritisation exercise, consider the following;
- Country of origin – is human rights abuse prevalent? How likely will workers be supported by their governments during the Covid crisis?
- Industry sectors – is there a reliance on vulnerable workers (e.g. low income, migrant, women, seasonal, zero-hour contracts)
- Supplier security – are any of your suppliers highly reliant on your business for their own survival? Are you their sole customer? Do they have a high risk of bankruptcy, with low cash reserves?
Your supplier engagement strategy must be carefully considered.
Once you have established where your biggest risks and impacts occur, there is an opportunity to support your smaller or medium-sized suppliers, particularly with their cashflow.
SEDEX (Supplier Ethical Data Exchange) issued guidance on 16 March, recommending that buyers consider the impact on workers at every stage of their supplier and contract negotiations and follow the United Nations’ Guiding Principles on Business and Human Rights or the OECD Due Diligence Guidance for Responsible Business Conduct.
They also suggested how they can support their less resilient suppliers to remain solvent and afloat during the pandemic, by:
- offering better payment terms
- offering financial facility or low-interest loans
- allowing delays in delivery dates
- suspending penalties for not meeting contractual obligations.
Collaboration – Some industries are collaborating to support common suppliers and enhance the resilience across their extended supply chains. By working together and sharing data, larger businesses are not only protecting their existing suppliers but also widening their supplier network.
Diversification – Governments are calling for help across all industries to increase the production of essential life-saving equipment such as ventilators and protective equipment. Buyers are in a unique position, due to their knowledge of their supplier capabilities, to enable businesses to adopt new production processes.
Advocacy – Collectively, businesses can lobby governments to strengthen the support provided to the workers in their supply chain affected by job losses as a result of the pandemic.
Case studies
H&M
As fashion retailers across the globe cancelled or delayed orders, H&M informed suppliers that the business would pay suppliers for the orders they had already fulfilled or started. H&M confirmed it would pay suppliers under the original terms agreed, without seeking additional discounts.
Morrisons
Temporarily scrapped its 14-day payment terms and paid small suppliers as soon as an invoice was received. The business also re-classified small suppliers as those with a turnover of under £1m (previously £100,000), meaning an extra 1,000 businesses benefited from the new payment terms. 3,000 small suppliers, including 1,750 farmers, would benefit.
Unilever
Offered 500 million euros of cash flow relief through early payment to small and medium-sized suppliers and extended credit lines for small-scale retail customers. The business also protected the pay of employees and contractors for a period of up to three months.
Questions to ask your supplier
Operations and supply
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Workers: skills and capacity
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Financial impact
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