In the constantly evolving COVID-19 crisis, procurement resilience is being tested like never before. Amid unprecedented disruption to supply chains in categories like medical supplies and healthcare, technology procurement has not been left unscathed.
With regions including China, India, south east Asia and in some cases Europe, being critical links in the global technology supply chain as manufacturing and assembly hubs for a number of components, the technology supply chain has taken a massive hit. While affected countries' lockdowns gradually begin to ease at varying paces, the impact and pace of escalation of the pandemic have given rise to new procurement challenges as border closures and lockdowns across the globe continue.
Need for robust and agile procurement
Procurement resilience describes the procurement function's ability to operate and support the broader supply chain during a major disruption or unforeseeable event, and thereby minimise impacts on business critical processes. This means playing an active role in preventing supplier performance issues, arranging alternate sources of supply, ensuring contractual risks are mitigated and addressed, sourcing new products or tools, and collaborating with internal and external stakeholders in order to mitigate the impact of the disruption to the organisation.
Organisations are facing a number of new challenges including increased risks to business continuity; the health and welfare of their employees and stakeholders; security management risks (cyber, data and operational); the imperative and consequences of rapid decision-making; maintaining workforce productivity; and ensuring the stability of critical business processes underpinned by core technology and systems such as ERP, Network, Infrastructure, Applications and Data.
These procurement challenges call for robust and agile response strategies with implementation horizons ranging from immediate, short to mid-term and long term.
Need for robust Business Continuity Planning (BCP)
As society emerges from the COVID-19 experience there will be a renewed focus on the BCP process. BCP plans will need to cater for more extreme disruptions than previously contemplated, and stress tested against these scenarios - and this will need flow through to outsourcing service providers providing business critical services.
Previously it was often sufficient for a supplier to acknowledge the requirement to develop a BCP. However, businesses will now need to require their suppliers' BCP plans to support their own BCP strategies. This means that suppliers will need to provide evidence of compliance with these requirements, including stress testing results.
In a future with heightened risk of global disruption, organisations will also need to consider the extent to which offshore outsourcing remains appropriate for critical business functions. Clients will need to consider and test the ability to rapidly step-in and assist service providers (for example providing infrastructure for service provider personnel to work remotely) or transition the disrupted offshore services back onshore.
Our experience with regulatory change emerging from the Global Financial Crisis, such as the imposition of more stringent capital adequacy requirements, might suggest regulators will become more prescriptive in their business continuity requirements for regulated entities, and may require greater oversight of outsourcing arrangements.
Immediate procurement response strategies
Manage risk with strategic suppliers
Identify your key direct suppliers and understand their ability to meet supply requirements and potential risks, in particular those in the high tech, semiconductors, AV (audio/video) devices, cables, computer accessories and peripherals categories. Organisations that have already embarked on the digital transformation journey of their procurement function may also consider use of Artificial Intelligence (AI) and Robotic Process Automation to manage large-volumes of orders, run repetitive sourcing events and update inventory lists, thereby putting tactical tasks on auto-pilot mode and allowing more time for value-add activities.
These technologies can also play a crucial role in helping organisations map supply chains for their critical global suppliers. The aim is to leverage information received under their agreements with suppliers to understand global sites and subcontractors, and create visibility of parts that originate or pass through those sites. Having access to this information can be a game-changer in proactive supply chain risk management as it facilitates timely decision making in planning avoidance and mitigation strategies during disruptions. For example, a manufacturer or retailer could manage demand by providing substitute products at discounted prices, booking warehousing and distribution capacity at alternate sites or reconsidering existing inventory allocations.
Suppliers may consider much of this information to be commercially sensitive or confidential and will need to treat it carefully, including in accordance with NDA requirements and confidentiality provisions of other supplier agreements. Consideration should also be given to the source(s) and terms and permissions for use of any data for this purpose, including third-party data used or any data used other than through direct provision from the supplier.
Another critical aspect of managing strategic supplier risks is to ensure any agreed adjustments to contractual obligations (such as delivery terms, milestone achievement, KPIs, service levels etc) are formally documented, if necessary through a contract variation, to ensure that the duration and conditions of such adjustments are recorded. This way parties can ensure there is a shared understanding of revised terms and of how/when the old terms will take effect again, thereby helping to avoid disputes relating to contract performance.
Leverage your supply network to access alternate sources of supply
Procurement should be ready to quickly mobilise secondary supplier relationships. For example, a manufacturing business that heavily relies on China for precision manufacturing, could adopt a strategy of using pre-approved parts or raw-material substitutions in places where the primary supplier is impacted but a secondary supplier is not. In the past organisations have resorted to an integrated supply management approach with their key suppliers during times of crisis in order to establish a shared resource pool of essential products and services.
Any restrictions on, or consequences of, using alternative suppliers under agreements with existing suppliers need to be considered and addressed. For example, if an exclusive supplier has been appointed but cannot meet the organisation's demand, does the contract anticipate those circumstances or could the organisation technically find itself in breach if it orders from another supplier - assuming frustration or force majeure (see below) are not applicable? If so, a contract variation may be required. Similarly, minimum spend/volume commitments may need to be considered and possibly renegotiated.
Support SME suppliers
The unprecedented disruptions caused by COVID-19 are having a huge impact on the financial health of many SME suppliers, particularly those that do not have easy access to liquidity resources or adequate cash flow. Large organisations may be in a position to provide essential support to their troubled SME suppliers by taking simple actions such as increasing accounts-payable periods or reducing payment terms (possibly even transitioning to payment in advance rather than on/following delivery), in turn buttressing their own supply chain by helping their SME suppliers stay afloat. Any such changes to supply relationships and terms, together with their conditions, should be documented following any process and requirements for contract variation in the agreement(s) between the parties.
Alternate strategies for some organisations may see the use of commercial models such as providing low-interest loans in return for improved or preferential trading arrangements. Such organisations will need to consider the extent to which they may be required to obtain an Australian Credit Licence, comply with the Anti-Money Laundering/Counter-Terrorism Financing Act and the Financial Sector Collection of Data Act depending on the borrower and the volume of lending.
Ramp up your digital technology landscape
The COVID-19 pandemic and related containment measures including lockdowns, have agitated the technology procurement approach in most organisations. The ongoing disruption to personnel availability and constraints caused by social distancing measures, coupled with disruption to hardware supply chains and product availability, have considerably reduced supplier capabilities. Meanwhile the massive shift to remote working is increasing the demand for connectivity, adaptive security, Software as a Service (SaaS) enabled collaboration platforms, cloud acceleration and infrastructure steadfastness.
A review of supplier contracts of critical sections of the organisation's technology landscape that require rapid ramping up should be undertaken to understand whether the existing supplier relationships have the flexibility and commercial frameworks to support this outcome. At the same time existing contract terms should be reviewed to assess whether they are appropriate for the new landscape, and what penalties or legacy charges might be incurred for abandoning existing technologies, licences and support services in transitioning to new systems to support the organisation's needs as well as shoring up and expanding its existing infrastructure, platforms, licenses and security.
One technology many organisations may ramp up is Remote Project Management. A virtual Project Management Office leverages either a single remote project management platform such as Microsoft Projects or a combination of multiple tools like Slack, Trello, JIRA and Atlassian Confluence. The objective should be to enable clear communication and collaboration with virtual teams that feel connected, centralise data to allow easy and secure access to project data, and efficiently track and monitor key activities and costs.
Conduct your contract negotiations remotely
The ongoing circumstances associated with COVID-19 have a considerable impact on both the form and nature of negotiations creating an increased push to adopt collaborative solutions that allow virtual negotiations.
Organisations can employ practical strategies and tactics for virtual negotiations and should avoid settling for a sub-optimal outcome. The crux of any successful negotiation, whether in person or virtual, lies in preparation and strategy. An easy to use and robust videoconferencing tool, rather than just the telephone, is crucial, allowing for more effective relationship building with the other party. Some pragmatic tactics to make virtual negotiations seamless include restricting use of video to lead negotiators from both parties, establishing secured alternate communication channels for internal stakeholders to privately communicate, and establishing role and process clarity. Providing a thorough recap of the discussions and agreements is also key, and screen-sharing facilities that reflect agreed document amendments and/or minutes in real time for all participants to see can save time and confusion in ensuring everyone has a shared understanding of agreed and open points.
Short to mid-term response strategies
Manage demand volatility and spend
Procurement professionals should assess and redefine category strategies to strike a balance between cost and risk / business impact, starting with day-to-day procurement operations to leveraging risk assessment tools that make use of machine learning to find patterns that indicate risks or opportunities in macroeconomic, geopolitical, exchange rate and other data.
Cost savings have always been a key focus area for procurement organisations, and will continue to be during and after the COVID-19 crisis. Organisations may more closely scrutinise major spend categories and off contract / maverick spend areas. Utilising cutting edge spend analysis and benchmarking solutions can help categorise expenditure to allow better cost control. AI-powered contract metadata extraction tools can be used to supplement legal review of contractual terms across a broad supplier base.
Assess and revisit key contract risks
As organisations move from dealing with the immediate impacts of the pandemic to longer-term consequences, it will be increasingly necessary for them to deal with contractual obligations that cannot be performed as a consequence of COVID-19 and/or to ensure that contracts continue to reflect and support the commercial relationship between the parties, which may have drastically altered during the crisis response and aftermath. This includes obligations owed to the organisation as well as those owed by the organisation.
As noted above, ongoing contract adjustments for revised supplier performance should be documented and managed. Where obligations cannot be performed the force majeure clause of the relevant agreements should be considered carefully. Absent a force majeure clause the contractual doctrine of frustration may be applicable and advice should be taken on this issue as it may be applicable on a case-by-case basis depending on the subject matter of the contract and the nature of the obligations affected.
A force majeure clause relieves a party from performing its contractual obligations due to an event outside the reasonable control of the affected party. Force majeure is a contractual concept not generally recognised in Australian common law (in contrast to the doctrine of frustration). Due to their nature as a product of contractual negotiations, parties have the freedom to negotiate force majeure clauses as they see fit. This means force majeure clauses will vary from contract to contract and need to be considered on a case by case basis to determine the extent to which they may offer relief in the context of the pandemic.
The effect of a force majeure clause will differ between contracts, and organisations should think carefully about the possible consequences of activating a force majeure clause. These consequences commonly include termination of the contract, extensions of time, excuse from liability for non-performance or delay, suspension of contractual obligations, renegotiation of certain terms, or some contract remediation or governance measures.
Long term response strategies
While giving rise to new challenges, the COVID-19 pandemic has required, and will continue to require, many organisations to rethink, reform and reshape their technology strategy and the critical role procurement plays in building and sustaining the cross-functional resilience.
Longer term, organisations should consider developing a robust procurement transformation framework that is underpinned by a responsive and resilient risk management operations capability. A capability that is technology led, agile yet resilient and leverages applied analytics supported platforms, AI and machine learning. Lessons learned from the current, unprecedented, experiences may be applied to create a digital technology and talent roadmap that enables increased preparedness to tackle future supply chain disruptions. This may be achieved by defining small incremental programs that drive procurement efficiency and partner with your key technology suppliers to mitigate process and system vulnerabilities.
Our team is available to discuss the impacts of COVID-19 on technology procurement and the journey to building resilience within your procurement and supply chain function.