Small and medium-sized businesses are critical players in corporate supply chains. Sometimes their participation is opaque in that they exist as undisclosed sub-contractors.
The policy response to the current crisis has been to treat it as a liquidity crisis. Specifically, the shock of the Covid lockdown and its disruption to business was seen as a temporary first-order effect. Government programs such as the Paycheck Protection Program provided loans to small businesses to ensure that they could keep making payroll and stay intact through the lockdown.
However, the impact of the lockdown economically has been more complex than anticipated. It has lasted longer than what policymakers originally anticipated. While there have been some limited openings, we are nowhere close to a return to normalcy. We may never go back to doing business the way we did before. Demand patterns may have changed permanently. These second-order impacts could lead to waves of novel business disorder through the Fall and Winter of 2020-2021.
At some point, the liquidity crisis will become a solvency crisis for many vendors.
All of this poses risk to small and midsized businesses and, concomitantly, risk to the supply chains of larger businesses.
Buyers need to understand what the complex interdependence in their supply chains means for risk.
Visibility: Buyers need to see who supplies their suppliers. They likely need to know two to levels down. Vendor management approaches that limit themselves to immediate suppliers leaves undiagnosed vulnerabilities to second or third tier suppliers. Buyers need to extend vendor management to these subsidiary categories.
Capacity: Not only do buyers need to understand the financial wherewithal of their suppliers and their suppliers’ suppliers, they need to have a picture of capacity. How has capacity been affected by the pandemic? Do suppliers have the ability to adjust dynamically?
Access to Capital: Do suppliers at every tier have access to the capital they need to survive this period?
Armed with this data, the procurement staff need to make decisions to mitigate and to rationalize their exposure to risk.
Buyers need to re-evaluate everyone of their suppliers. Who do they keep and who do they let go? The costs of engaging with a supplier who subsequently fails can be enormous, especially if they are not anticipated. If the risk of a supplier liquidating or lacking the resources to deliver is preponderant, then let them go. At a minimum, diversify your exposure by adding new suppliers.
If a supplier is deemed to be salvageable (or, ideally, one that could thrive through this unusual period in an antifragile manner), then take steps to mitigate the risk and to help them. Give them more business. Pay them upfront. Ease the terms of delivery. Help them access capital wherever possible, either with references or some form of direct funding.
The key to this new supplier engagement is collaboration.
These are difficult times. With the right approach to procurement, buyers and suppliers can emerge with reinvigorated relationships, more robust to future stress, and more productive for both sides.
EdgeworthBox is a platform for strategic sourcing, generally, that enables this more holistic approach. We do so as a layer that complements existing procurement infrastructure, so that buyers can execute an RFP cycle that leads to more supplier proposals, when an RFP is appropriate and also develop relationships with suppliers that are suited to a broader context. All without changing the infrastructure they have invested so much in building to date. Give us a shout. Or take us for a free spin.
