Covid-19 and the benefits of effective SRM
19th May 2020
The role of procurement has changed drastically since the value of strategic procurement was initially identified. In the wake of Covid-19, the focus has now moved to Supplier Relationship Management.
Procurement was once viewed as an admin function, with the Buyers’ role limited to placing orders and expediting deliveries; deals were made over a conversation and a handshake. In recent decades the value that effective, strategic procurement can add has been recognised and market leaders globally have reaped the benefits of strategic sourcing and category management whilst taking advantage of the best talent and the best technology in order to achieve the highest possible value from their suppliers. As procurement matured, the previous decade saw the conversation progress towards the value which digitalisation can bring and how procurement can lead the way towards being part of a more sustainable world.
Today, in the midst of an unexpected global pandemic, the focus has moved towards an effective Supplier Relationship Management (SRM) programme, emphasising the importance of close relationships with the most critical suppliers. Procurement and Supply Chain have become the saviours of business, with those who have effective Supply Chain Management and SRM in place vastly more likely to survive (and even thrive during) Covid-19.
A refocus on SRM?
Procurement has always been, and always will be targeted on its savings delivery and its success in cost reduction. This has led many procurement professionals to focus most of their efforts on pre-contract activities, which has resulted in a huge lack of investment in its SRM.
It’s only now that supply chains are being put to this extreme test that the full value of effective SRM is being recognised. The immediate focus has changed from “how can we cut costs?” to “how can we work with our suppliers to ensure we survive this?”. The latter will be significantly more difficult without strong relationships in place with key suppliers.
How does SRM help prepare for the unexpected?
SRM can be an effective approach to in BAU as well as times of distress, but it’s more than just a word and organisations need to seriously think about how they use SRM to work with their critical suppliers and protect their interests:
- Who are your critical suppliers? SRM is not a one-size-fits-all approach and largely focuses on your critical suppliers so identifying which suppliers are truly critical is key. The metrics involved in defining a critical supplier vary by industry, but the underlying theme is 3rd party risk.
- Mutually beneficial relationships. Once identified, defining the appropriate level of management as well as objectives of the relationships is key. These objectives must be balanced, ensuring there’s something in it for both parties or when things get difficult the relationship may crumble. Close working relationships also provides a heads up to any change in their financial stability, on both sides, or ability to continue supplying or paying for goods/services before it becomes a problem so that contingencies can be put in place.
- Understanding the contract. A deep understanding of the contract is paramount to understand how the two parties can better support each other, and to thoroughly understand the SLAs which monitor their performance. Whereas in a BAU environment it might be expected that all SLAs are in the green, it may now be necessary to compromise and agree upon which SLAs are critical and which can be suspended. By doing so, it will allow the supplier to focus on the most critical aspects of their performance, whilst temporarily moving their efforts away from activities deemed non-critical.
- Force majeure? Another consideration is whether contracts include a Force Majeure clause and if so, what affect they have on the responsibilities and liabilities of each party. As the world moves past the devastation caused by Covid-19, you can expect to see a Force Majeure clause included more regularly in contracts, but SRM is an effective tool which enables both buyer and supplier to work together and minimise impact in uncertain times.
- Business continuity provision. Too often business continuity plans are a statement of intent, or a few lines in a contract, and rarely tested or put into action (thankfully). Covid-19 has demonstrated the impact of lack of provision so now is the time to revisit your suppliers’ business continuity arrangements and work with them to ensure they are robust enough to survive this crisis.
Open and transparent communication is key
Simply having an approach to SRM and tagging suppliers as ‘critical’ is not good enough; it needs to be put into practice, relationships already established and be flexible when a crisis occurs.
Regular, open and mutually beneficial conversations around your and your suppliers’ financial situation is key to understand how you can better support each other through this ‘rough’ patch. If you are struggling, you may need to agree payment holidays or extended payment terms to allow you to stay cash flow positive. Conversely, if your suppliers are struggling it could also be a case of reducing payment terms, or temporarily changing to immediate terms to support their cash flow. For example, Morrisons changed to immediate payment terms for all their small suppliers to provide them with cash flow support during Covid-19 disruption.
More frequent governance meetings will be required to ensure both parties are updated on each other’s financial situation, and to ensure regular review of supplier performance. Monthly MI and a quarterly review might be the norm as stipulated in your SRM policy, but through these turbulent times it is recommended to increase the frequency of reviews to ensure performance is maintained and any issues are known before it is too late, this could potentially be a weekly or even daily update.
The long term
SRM has been given a new voice. It’s notoriously difficult to quantify the benefits of SRM, which is often why organisations focus on pre contract sourcing and savings delivery, however it’s now proved its worth and the landscape and focus of procurement will be changed forever.
Through collaboration with their suppliers, business leaders are paving the way towards a brighter future. As we embrace the ‘new normal’, relationships rather than transactions will make or break a business.
The profile has been raised; now is the time for businesses to invest in their SRM capabilities to build resilience and preparedness. If one thing has been proven by Covid-19, it’s that we never know what’s around the corner.
Here at 4C, we are committed to addressing the broader impact of the effects of COVID-19 in our businesses, in our communities and society. Please contact us with any questions or concerns about your procurement and supply chain – we are here to help.