Supply chain resiliency is on the minds of all supply chain managers and executives operating national, regional, or global supply chains. Most companies do contingency planning and periodic supply chain plan reviews as they occasionally face disruptions from natural catastrophes, geopolitical upsets, and continually changing trade negotiations, to name a few.
But COVID-19’s spread has brought persistent and potentially long-term disruptions and a whole new set of challenges—from slowed product sourcing, lead times, procurement, and shipping to bankrupted suppliers to fluctuating supply prices. It has changed some supply chains permanently.
How to stay ahead of supply chain disruptions
If the coronavirus has taught us anything, it's that supply chains are fragile and vulnerable. Companies need to develop a more sustainable business model for the future by rethinking their supply chains and how they protect strategic suppliers. To build resiliency and avoid disruptions, we suggest making the following changes to your procurement and supply chain practices:
Scrutinize your suppliers' financials to reduce, manage, and mitigate supply chain risks
It’s a great time to start employing risk sensing and leveraging external data to gauge potential financial or supply chain risks to your firm. Are you considering new suppliers? You can set up Google alerts for daily news on target suppliers’ activities.
In addition, online research will reveal their business history and health. Do they typically deal with problems by reducing their workforce, eliminating services, selling subsidiary businesses or production lines, or engaging in mergers or acquisitions? If you see a pattern, beware. But introducing new products or services, adding leadership, or upgrading facility and equipment all indicate a healthy business.
We recommend requesting financial statements or checking credit history (via a credit bureau like Dun & Bradstreet, Experian or Equifax) to determine their credit score, business revenue, sales volume, the value of assets, ownership information, bankruptcies, and payment history.
You can also go directly to the supplier with questions that will give you a more definite sense of their market diversity, working capital, access to liquidity, and their ability to survive the downturn and reopen their business. For additional information on understanding your supplier’s financial health, check out our Guide to Navigating of Customer Credit.
Diversify your supply chain by identifying and eliminating single points of failure
Putting too many eggs in one proverbial basket or supplier or in one geographical location can hurt your company’s resiliency. In short, you need to build redundancies into your plan.
To achieve redundancy and supplier diversification, make sure suppliers regularly fill out questionnaires about stock levels and explore your options for buying up critical stock in advance. And rather than focusing on the suppliers with whom you have the highest spend, focus on strategic suppliers who impact your organizational outcomes and those who would be most difficult to replace.
Carefully map your entire supply chain network to gain a sense of where your risk exposure lies, locating your raw material suppliers, sub-contractors, or 3PLs. You can also explore the potential for sourcing from local suppliers in an emergency.
With in-depth visibility across tier one, two, and three suppliers in your most important categories, you can manage suppliers strategically and make the choices that reduce your overall supply chain risk in the most critical areas.
Ensure suppliers’ financial resiliency by paying on time and offering flexible or early payments
COVID-related production slow-downs and longer-than-normal delivery times can mean late payments, which are especially painful for suppliers who need access to liquidity. Supplier problems are often exacerbated by already long payment terms that place them in a very difficult financial position. To ensure a mutually beneficial solution, it makes sense to do your best to pay on time or, to further alleviate supplier liquidity concerns, offer early or flexible payments that:
- Helps improve cash flow, reduce days sales outstanding (DSO), and optimize the cash conversion cycle. By remaining a reliable partner who pays on time or early, you’ll keep your strategic suppliers loyal and may even introduce new bidders due to your excellent reputation. You can offer suppliers early payments through supply chain finance or recommend that they use a service such as invoice financing.
The accelerated cash flow generated through early payment speeds up your cash conversion cycle or the amount of time it takes for your company to convert investments in inventory or services into cash. Shortening the cash conversion cycle lets companies invest in new products and services and find a quicker path to profitability. It also allows companies to show a more substantial amount of cash on their balance sheet than by waiting for open receivables to be paid after a reporting period—a great way to improve leverage ratio, an essential metric to banks and investors.
- Replaces allotment for late payments. Many companies offer their customers discounts on late payments of invoices that are tied up in-process due to disputes, adjustments, or other issues. If a company is willing to take a discount to avoid nonpayment, it may make sense to offer discounts for early payment that can help reduce late payments and improve DSO from the start.
Today, cash flow and liquidity are essential. And there’s sound logic behind this truism: Freeing up working capital from the supply chain lets companies strengthen their financial health—and that of their suppliers--and better prepare for and flex with unexpected disruptions.
Want more insights on how to build a resilient supply chain? Watch our free, on-demand webinar: Future-Proof Your Supply Chain Against Disruptions.