The impact of COVID-19 on Procurement & Supply Chains - and a way forward for New Zealand?

INVITE: This crisis offers procurement & supply chain opportunities from an economic and a sustainability perspective. Let’s not waste this moment, and start acting now. I invite academics & professionals to share your suggestions and ideas!

My beloved New Zealand is in an unprecedented lockdown. This limits our daily lives to working from home and no fun outside. Only shopping at the supermarket or the local dairy shop. Keeping 2 meters distance and only having short walks in the neighbourhood. Other parts of the world are struggling with COVID-19 with over 1 million infected and over 50,000 people dead!

So far (early April), the impact in NZ has been modest. Staying at home, I got bored. I have never completed a 1,000 piece puzzle. (See the Waddington football match above). Now I almost have, and realise that complex pictures lead to complex puzzles. This football stadium (which can be seen as a system) is packed with people with different backgrounds and purposes. (Hence different subsystems). Initially I thought the blue team played against the red team; and that both had their supporters. However, the picture shows more teams, different matches, a couple trying to play cricket or get married. A player with a rugby ball. Some players are cheating and offensive. Others are simply in despair, or celebrating a victory. Too many players and too may footballs. The strange thing is, that each piece of the puzzle is difficult to understand, and only gets its full meaning when combined with other pieces. The football match looks like our world in its current state. We are living in a VUCA world (Volatile, Uncertain, Complex, and Ambiguous; Bennett & Lemoine, 2014). However, this acronym VUCA now needs an extra C. (VUCCA). It is a Crazy world we live in.

According to Deloitte (March 2020) COVID-19 disrupts (1) production, (2) supply chains, and (3) finance & markets. The puzzle has some parallels with the current flux on procurement & supply chains.

We are in this together, in a small and far-away country in the South Pacific. Being a procurement researcher at the Auckland University of Technology, I browsed over the Internet to gauge the impact of COVID-19 on procurement and supply chain management. My research domain has never been more in the news. Enough examples and cases to re-write textbooks and training material. I feel dwarfed by the scale and complexity of this human tragedy.

WORLDWIDE

It is hard to find fresh data. Nevertheless, a survey from the Institute for Supply Management (ISM) shows serious disruptions in the US. (See below). ISM held the survey (N=600) during wk. 7-8; the current situation will be worse. Their research also found that 44% of US companies had no contingency plans for the fallout in China; those companies will now be worse off.

CURRENT PROCUREMENT

This is a wake-up call for Supply Chain Management (Choi ea. in the HBR, 2020). Naturally, procurement of medical devices and personal protection gear is in a frenzy, to put it mildly (see e.g. Oehler ea. March 2020). We see the every-man-for-himself-approach. Lack of inbound quality control, risks of sole sources and too little diversification, geopolitical risks, low inventory levels, limited risk management. The World Economic Forum (Doherty & Botwright, March 2020) held a survey in 2012 on global supply chain disruptions. A pandemic such as COVID-19 was on the list; apparently that was not enough to prepare and diversify supply chains for the shock we witness now. Goldschmidt ea (2020; 28) in their March article attribute this to a strong and short-term focus on cost minimalization and underweighting small probabilities of severe disruptions, and lack of cost and risk information. The above HBR article (page 3/5) says extensive supply chain risk mapping is simply too expensive, and the procurement function is evaluated by their cost savings and not by their ability to assure revenues.

Long-term relations with preferred customers (Schiele, 2014) become important. However more often, relations are NOT important with frantic spot-buying (check these suggestions from NLPA website; 2011), or even with dishonestly buying material that had already been sold (The Guardian, 4 April 2020).

So much for our hard-fought professional codes of ethics in procurement (NIGP public procurement in US, CA; CIPS; ISM; NEVI). Alas, this is not new. Several good research papers show that buying organisations do not always behave ethically. This body of research indicates that non-ethical procurement behaviour can have negative impacts on the buying organisation and other stakeholders. It would warrant further research on the current situation here in New Zealand; perhaps in combination with the situation in the Netherlands. (#Kees_Gelderman).

On the other hand we e.g. see UK manufacturing companies entering medical appliance markets (Green, 2020), similar as during the 2nd World War. This poses stress on buying organisations throughout the chain and with competitors, and could work. My guess is that tender & competition laws are being bypassed for the greater good. This pressure-cooker type of procurement offers future learning for public procurement innovations for the challenges we face, be it overheating cities, failing infrastructure, health care innovations, mobility or energy transitions. Compare this current procurement approach to findings by Hughes & Weiss (2007) and Rigby (2013) that procurement can hinder suppliers in adding value. Check the two diagrams below (from Staal, 2015).

Procurement of goods & services not deemed critical to combat COVID-19 witness a drastic decline. Some even suggest this is the steepest decline since the 1929 stock market crash. It is part of the financial disaster following the COVID-19 pandemic. Managing the scale-down and managing working capital and cashflow in supply chains is key. (An insightful NZ Grant Thornton webinar; March 2020). We see several retailers taking a one-sided and short-termish and dark side approach of procurement of extending payment terms. However, other organisations continue to pay their suppliers and/or start a discussion with their supply chain partners on possible mitigation strategies. (See the LinkedIn thread by Finn Wynstra). These organisations know they will need viable & strong suppliers to prosper again after this COVID-19 crisis. Such suppliers will then likely be innovative, have good product offerings, are flexible in their supply, and work on sustainable development goals.

Note, that according to Johnsen ea. (2019: 57) a focus on supplier costs is only strategic if the buying company pursues a cost-leader / operational excellence strategy. Most companies however try to get away from pure price competition and include customer intimacy or product leadership strategies (Treacy & Wiersma, 1993). Hence focussing too much on lowest supplier costs would be detrimental to such buying companies. Moreover, as the best-value advocate Dean Kashiwagi once remarked: bad procurement destroys supply chains. AND: focussing on lowest cost may be good for individual companies, but not necessarily for the financial recovery of an entire industry.

SHORT TERM

The Internet shows several procurement best-practices to counter the current economic downturn caused by COVID-19. The website SpendMatters gives an overview of digital procurement tools, even more important in times of social distancing. As face-to-face meetings will remain limited for a time to come, e-tender (RFx) or e-auction systems could see a sudden rise when companies e.g. need new suppliers. The online journal Supply Management (Green, 2020) recommends three measures: (1) to drastically cut costs and generate cash; (2) get the supply chain agile; and (3) ensure long-term structural cost advantages. The CIPS website maintains a good overview, which includes useful guidances (SHORT, and MORE & LONG) for procurement & supply chain professionals. The ISM website also provides information over short term and longer term actions. The New Zealand Government has an emergency procurement guidance. (19 March 2020). 

Note that tips & suggestion may differ on certain aspects, also depending on the prevailing sourcing business model. (See the Vested cheat sheet. Keith, Vitasek, Manrodt & King; 2016). It would need some research to see whether the VESTED model still stands in these times of crisis.

LONGER TERM

The common opinion seems that recovering from COVID-19 and the financial crunch may take up to 1 to 3 years. Hence supply chains and manufacturing will be affected for some fiscal years to come. Digitalisation of procurement processes will speed up, and also traditional small businesses have no time to lose. (See my blog on Procurement & SMEs & Digitalisation Dragons, 2017). Some tools may require re-engineering of processes; others are easier to use and would fit the informal decision process of SMEs.

Whereas complex interventions as supply chain integration in NZ SMEs has witnessed a “disappointingly” slow uptake (B?hme ea. 2009), stand-alone tools could see quicker adoption rates. (Staal ea. 2016). Digital procurement tools such as being developed by the Dutch scaleup Innovatiespotter (Gea Vellinga) and Hanze University (Said el Hami, Delano Maccow, me) could help to find & select innovative suppliers with a mobile app. The app will work for small business owners as well as for NPD/innovation and procurement professionals. It will reduce (international) travels to trade-conferences with hit-or-miss business contacts and uncertain outcomes.

The CIPS website (Green, 2020) sees six areas of long-term change: (1) more investment in ERP systems, (2) decentralised storage, reassessment of the basics on warehousing and distribution, (3) better risk management; (4) re-assess the list of critical suppliers; (5) more ramp-up facilities; (6) improved emergency operations. In the newest edition of the Journal of Purchasing & Supply Management, six leading procurement experts recommend: (1) use technology to enhance procurement capabilities; (2) develop talent & life-long learning; (3) expand sustainability efforts; (4) stimulate supplier enabled innovations. (Van Hoek ea. 2020).

SO WHAT ABOUT NEW ZEALAND

The British poet John Donne (1572-1631) claimed that “no man is an island […] every man is a part of the main”. This virus impacts lives and supply chains worldwide.

However the current health situation in New Zealand (4th of April 2020) seems less dramatic. One possible strategy is to eradicate the virus, and have the borders closed as long as the threat remains. This would imply that NZ must rely more on regional supply chains instead of global supply chains.

Business-to-business will experience delays in lead-time, scarcity and out-of-stocks of materials and components. Nevertheless, this is an opportunity to improve competitiveness of New Zealand supply chains. With shorter supply chains, aspects of trust and governance are easier to manage. After all, personal relations in New Zealand supply chains do matter (Wang, 2018) as do supplier collaborations on innovations (Staal 2019; Patrucco ea. 2017). Moreover, investments in sustainable development in local supply chains are easier to realise and have larger and quicker benefits for stakeholders involved. A possible slowbalisation (PWC, 2020) of supply chains does not imply a return to an autarkic New Zealand. As a small and open economy, NZ has always relied on international trade.

There is sufficient established research (e.g. B?hme ea. 2009; Childerhouse ea. 2011; B?hme ea. 2008; Wood ea. 2014; Sajjad ea. 2019; Survey on NZ public procurement 2019; Reefke & Sundaram, 2017; Wood ea. 2014; Donovan ea. 2017; Vested 2019; UoA special issues on SCM) that discusses a wide range of improvement potential in the design and management of New Zealand pocurement and supply chains.

Improvement will both be on exploitation (improved operations) and exploration (improved products & services). After the COVID-19 & subsequent economic crisis, we still need to be competitive on a global scale. The world will have changed into more VUCCA. (Volatile, Uncertain, Complex, CRAZY and Ambiguous).

Nevertheless New Zealand businesses can use four potent weapons: agility, information, restructuring, and experimentation (Bennett & Lemoine, 2014). The Waddingtons puzzle I mentioned earlier seemed crazy & complex, but appeared manageable.

This crisis offers an unprecedented opportunity to improve performance of New Zealand supply chains, both from an economic and a sustainability perspective (World Economic Forum, 2020). It will take leadership, co-optition, a systems' apprach, a will to cross chasms, and perserverance.

We made a mistake during the Great Financial Crisis and expected that things would return to normal. Let’s not waste this moment and start acting now!

Please contact me with your suggestions and ideas.

Anne Staal, Auckland