COVID-19 Safe Supplier Operating Standard - Part One

In Part One we breakdown the key themes that COVID-19 has brought to the surface over the last 18 months, as well as how to implement supplier management at speed. - Learn more about the seven key risks that you can address to prevent interruptions from another pandemic-type event. - Discover how to accelerate value from your supplier relationships delivering rapid results even in the midst of a pandemic. - Find out how supplier management technology can be a key enabler for increased value, less risk and more transparency in your supply chain.

COVID-19 Safe Supplier Operating Standard PART ONE: SEVEN UNANTICIPATED RISKS AND SUPPLIER MANAGEMENT AT SPEED

WHITE PAPER AND OPERATING STANDARD BY JOHN NEWTON AND ALAN DAY

STATE OF FLUX

Contents

Introduction

The seven risks

The supplier solution

Building for longevity

Delivering rapid results

Technology and supplier management at speed

Summary

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Introduction

A t the time of writing, the world is dealing with the consequences and uncertainty created by the COVID-19 pandemic. The operating challenges are not a short- term issue - it’s not as though we’re waiting for an ash cloud to disperse – however this is, first and foremost, a tragedy affecting hundreds or thousands of people. It is also causing the biggest disruption in decades, indeed a lifetime, to economies and businesses around the world. From a procurement and supply chain perspective, the disruption is immense, but why? Because COVID-19 is unprejudiced, affecting every geography, industry, and sector. Typically, organisations focus on risks that are easy to predict and are inherent to their supply chain and outsourcing decisions. However, COVID-19 highlighted major gaps in risk planning simply because it wasn’t a “typical” business continuity risk: > It was sudden in nature and escalated quickly. > It had a universal impact on businesses, irrespective of industry or location. > The number of people, families, and businesses affected was extremely high. > It had a far-reaching effect on global and national infrastructure. To paraphrase a quote commonly attributed to President John F. Kennedy in 1963, this was the falling tide that lowered all ships. It wasn’t just a single supplier seeing these effects, it was quite literally all of them.

At the same time as being a huge challenge, difficult times

also bring once-in-a career opportunities.

This paper will address two main themes, highly relevant to supplier management in these difficult times. These themes are important not just because we think so, but because they are the ones our clients want to talk about as we stand in the middle of a pandemic: > Managing risk Managing risk to ensure continuity of supply and cost effectiveness, ultimately to protect business revenue and profit margins. > The Supplier Management solution How being the customer of choice to your key suppliers can be such an effective risk mitigation strategy. By focusing on learning and adapting (in some cases transforming) how you manage suppliers, you can deliver the supply chain resilience your business needs.

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The seven risks

Many organisations think they are good at managing their suppliers however our 13 years of annual supplier management research (giving us insight into >2,000 organisations with a global database of >2,000,000 data points) has shown that only 17% would be considered leaders in their approach to supplier management.

7 % OFORGANISATIONS INCLUDEPANDEMIC RISKS INTHEIRRISK MANAGEMENT SCENARIOSAND PLANNING 47 %

Our research also shows the reaction speed and the duration of disruption are both compounding the long-term impacts. The longer you wait, the more likely you’ll miss out on customer of choice benefits that are critical in tough times. When it comes to risk management, are you one of the 17% who are demonstrating supplier management leadership? Do your continuity plans deliver a graceful recovery with a tolerable level of disruption, without any longterm impact on delivery of business objectives?

Or are you one of the 83% that are operating with potentially flawed continuity plans and poorly managed supplier relationships? If so, you are at risk of experiencing supply disruption and loss of value. In helping global organisations to be more resilient during the pandemic, we have identified seven risk themes that are surprisingly overlooked and have been brought into sharp focus: 1. Health and availability of supplier workforce 2. Financial viability of the supplier 3. Organisational preparedness 4. Social distancing requirements 5. Port and airport closures (operating at skeleton operational levels) 6. Risk of spreading coronavirus via physical products 7. Demand shocks We’ll take a look at each one, suggesting our recommended actions to address the risks above.

OFORGANISATIONSSAID THEIRRISKMANAGEMENT WAS INSUFFICIENT 81 % OFSUPPLYCHAINS WEREAFFECTED

Is this happening to you?

INCIDENT

Damaging disruption with permanent loss

Source: State of Flux research

Time

Or are you one of the 9% that is using supplier management to do this?

INCIDENT

Managed disruption with recovery

Time

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Health and availability of supplier workforce 01 Key question > Is the supplier following relevant standards as set out by their local government or standards bodies? What employee checks are they doing? > Can they scale up when lockdown finishes? How do you check?

Recommendation > Put supplier management processes, policy, and procedures in place. > Train staff in supplier management techniques (using virtual delivery when in lockdown) > Rapidly deploy supplier management technology to manage the supplier relationship, performance, contracts, and risks. > Ensure communications are open and honest on financial stability, and ensure reviews and communication frequency is appropriate. > Review and potentially shorten payment terms. > Initiate an internal contingency plan looking at alternative (local) sources of supply? Recommendation > Require that suppliers upload contingency plans to your supplier management platform. Recommendation > Segment suppliers based on the risks they present to the business. > Request suppliers provide self-certified data on what actions they are taking to mitigate risks, including employee checks, including employee checks? > Track all supplier interactions (meetings etc.) > Ensure suppliers have KPIs and they are being completed, tracked, and managed.

> How structured are the discussions with your suppliers? Will they continue after lockdown? > How do you know they are performing? Are you tracking the right supplier KPIs?

02 Financial viability of the supplier Key question

> Can the supplier continue to operate? How do you know? > Are they impacted by other customers’ financial viability? If so, who, and how much? > How frequently and to what extent are you checking your suppliers’ financials and their customer contracts? How are you helping them? > Have you investigated alternative (local) sources of supply?

03 Organisational preparedness Key question

> Pandemic risks are usually looked at from an internal view only - do you have the same risk view for suppliers? What contingency plans are place? > Are staff trained in supplier management techniques? Have you measured your capability? > What technology is being used to manage the supplier relationship, performance, contracts etc.?

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Social distancing requirements

Key question > Are you able to physically meet with or visit the supplier? How are you going to communicate and interact in the future? > How will you audit supplier performance and risks? > What plans are in place to provide visibility of what’s going on? > Can you trace all the contacts within your suppliers to mitigate outbreak risks?

Recommendation > Use technology as an alternative to face-to- face engagement. > Provide supplier management training to business stakeholders and suppliers. > Use supplier management technology for contact management and tracing of your supplier’s personnel.

Port and airport closures (operating at skeleton operational levels)

Key question > Where are your key points of supply chain disruption? Who is managing them - you or your suppliers? > Who is responsible for finding alternative transportation and supply chains? How will you get priority for your products and services? > How are you going to achieve more visibility into the supplier and their supply chain?

Recommendation > Ask selected suppliers to map their key supply chains (using the segmentation criteria previously mentioned). > Put in place a plan and treatment strategy for key supply chain, logistics and transport suppliers.

Risk of spreading coronavirus via physical products

Key question > Do you know who is responsible for the risks? What checks are being done throughout the supply chain? > What do the contract clauses cover? How big is your exposure?

Recommendation > Review key suppliers contracts for risk exposure. > Map areas of responsibility and obligations. > Track key risks, actions and activities.

Demand Shocks

Key question > Do you know which products or services there will be limited availability on? > Do you know if you are a customer of choice for your key suppliers? How are you measuring it?

Recommendation > Understand if you are a customer of choice by conducting a Voice of the Supplier research exercise across your strategic or key suppliers. > Review each strategic and key suppliers account plans and put in place joint account plans for those suppliers.

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Supplier management has an important role to play in addressing supply chain risk and driving a structured, systematic, and repeatable approach to the safe operating of suppliers.

The supplier solution

O ur research shows that risk management (along with cost reduction) is one of the most often cited business drivers for supplier management with over 50% of survey respondents identifying it as the most important driver for supplier management in the next 12 months. This data was gathered well before the COVID-19 pandemic and the focus on risk management as a business driver was led by Financial Services and Automotive survey respondents, driven by regulatory compliance and operational efficiency respectively. As part of our consulting operations, we’re often asked which sectors have the best focus on supplier management to drive supply chain resilience – these are the two we cite. Effective management of supplier risk (especially as a treatment to lower likelihood and consequence of not being able to deliver safe operating) is a compelling reason to implement supplier management, yet our research reveals that only 9% of businesses are doing it effectively. That means that everyone else is waking up to the value of supplier management in the midst of a crisis.

The big question isn’t how to do it, but how to do it at speed? To answer the question we need to examine two work streams which will need to be carried out in parallel. Two workstreams for supplier management at speed 1. Building for longevity – Speed may be of the essence, especially in the midst of a pandemic, but if the time and effort of setting up supplier management is worth doing, it’s worth doing for the long- term and not just in the heat of a crisis. Furthermore, doing supplier management at speed doesn’t mean cutting corners. 2. Delivering rapid results - By addressing value delivery as a separate work stream, we can dramatically shorten the time it takes to see the benefits of supplier management. In many cases this can be reduced from months to weeks.

Risk management/reduction

58%

Cost reduction/avoidance

50%

More supplier innovation and continuous improvement

44%

Supply chain resilience

32%

Quality and service level improvement

25%

Improving supply chain efficiency

14%

Regulatory compliance

14%

The most important business drivers for Supplier management in the next 12 months. Source: State of Flux research

The majority of businesses are waking up to the value of supplier management in the middle of a crisis.”

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Building for longevity

Cutting corners is not an option when setting up supplier management for longevity. There is, however, a streamlined approach which is focused on getting the essentials in place quickly, as shown below.

Approach: High Criticality, High Collaborative Value Opportunities (SRM + SPM + CM)

TIER 1

SUSTAINABLE EXECUTION DELIVERS: > Relationship management > Risk management > Performance management > Contract management

Approach: High Criticality, Low Collaborative, Value Opportunities (SPM + CM) Approach: Medium Criticality Low Collaborative, Value Opportunities (CM + MBE)

Voice of the Supplier

Value proposition

Diagnostic

TIER 2

TIER 3

Build Business Case

Segment for Purpose

Implement Treatment Strategies

Deploy Process and Tools

Formalising a consistent, repeatable, and standardised approach for the long-term Under normal circumstances, this phase converts the results of the previous stages into a comprehensive, fit-for-purpose supplier management framework. The framework must be supported by the necessary guidelines, tools, and processes. As you get through the crisis, build broader support for the new approaches and ways of working.

Applying selection criteria to put the right effort into the right supplier relationships Under normal circumstances, the aim of segmentation is to identify suppliers where performance improvement, risk reduction, and value release are priorities. A good segmentation approach is one that allows a balance to be struck across multiple drivers and also accommodates supplier perception of the customer as an account. In a crisis, the segmentation criteria becomes heavily biased towards the factors that are inherent to the crisis – risk management and market complexity factors for example.

Creating the case for change

Employing supplier engagement and management methods according to segmentation output Under normal circumstances , supplier treatment strategies are a logical extension of segmentation and will define how much systematic effort will go into implementing supplier management. In a crisis, to build at speed the treatment strategies will need to be applied selectively, with the priority on addressing the current situation.

Under normal circumstances, best practice is to: > Conduct an “as is” assessment > Collect Voice of the Supplier feedback > Develop a supplier management value proposition. In a crisis, the value proposition becomes self-evident (grounded in the experience of supply chain disruption, for example).

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Delivering rapid results

BENEFITS DELIVERY PRODUCES: > Lower risk ratings > Value release > Supplier commitment > Customer of choice > Innovation pipeline

CEO

Executive

Commercial

Operational

01 02 03

Governance and Training

360 Review and Insight

Joint Account Planning

Deliver Return on Investment

Understand the true reality of each targeted supplier relationship Under normal circumstances, a 360 review builds on Voice of the Supplier research to uncover the insight needed to engage a specific supplier and develop the mutual value that is inherent to that relationship. This is an important prerequisite to In a crisis, the situation itself will provide the focal point and driving force to be addressed. Understanding (and mapping) the true structure of your suppliers’ supply chains, to the fullest extent, is critical to operating safely. undertaking joint account planning.

Collaborative working to address

Recognising a broad range of hard and

Mobilise people and processes Under normal circumstances, best practice is to: > Introduce supplier management specific role definitions and competencies. > Conduct a capability assessment and a training plan. > Roll-out targeted training. In a crisis, and to implement at speed, place the emphasis on just in time coaching and development rather than traditional learning methods.

common goals Under normal

soft benefits Under normal

circumstances, joint account planning is a high-value activity that capitalises on the common ground that exists between a sales-centric

circumstances, ROI can be delivered in many forms besides lowering risk ratings, including important “soft” benefits such as achieving customer of choice status. As you get through the crisis, it’s important to: > Adopt supplier management as a formal role. > Undertake 360 reviews of selected supplier relationships. > Undertake joint account planning as a systematic way of working (not just as a response to an event).

account plan and a supplier centric relationship plan.

In a crisis, time pressure and the crisis itself will result in joint-account planning being replaced by what might best be described as a “risk response” initiative. Introduction and rapid establishment of safe operating of suppliers is of paramount importance.

> Revisiting supplier segmentation and using it as a dynamic approach to identify high potential, high value relationships – this will mean letting go of traditional segmentation criteria. > Being much better students of our suppliers and their supply chains. > Recognising supplier management as a full-time professional discipline not just something that a category manager can do in addition to their other duties. > Investing in the behavioural skills as well as technical skills that make collaborative supplier management successful.

The steps outlined on above can be achieved in weeks rather than months. But there is an important issue to remember – we are not describing a crisis response, we are advocating a long-term change to how we manage supplier relationships, which means:

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If any supplier management programme is to be sustainable, technology support will be required. This is even more of an imperative when we need to address supply chain risk and actively embed a safe operating standard with our suppliers as a matter of urgency. Our experience and research shows that supplier management leaders are three times more likely to use technology than their peers, with a clear gap between passive vs. active management of supplier relationships, as seen below: Technology and supplier management at speed TECHNOLOGY AND SUPPLIER MANAGEMENT AT SPEED If any supplier management program e is to be sustainable, technology support will be required. This is even more of an imperative when we need to address supply chain risk and activ embed a safe perability s andard with our suppliers as a matter of urgency. Our experience and research shows that supplier management leaders are three times more likely to use technology than their peers, with a clear gap between passive vs. active management of supplier relationships, as seen below:

Supplier management technology adoption Source: State of Flux research

SUPPLIER MANAGEMENT TECHNOLOGY ADOPTION SOURCE: STATE OF FLUX RESEARCH

The findings of our research show a huge opportunity to shift expectations away from technology as an information repository and, with the right platform, becoming a key enabler of achieving supplier management at speed. Implemented correctly, technology will ensure the “building for longevity” work stream is sustainable whilst “delivering rapid results”. The table below summarises some of the activities that can be streamlined using appropriate technology to implement supplier management at speed. The findings of our research show a huge opportunity to shift expectations away from technology as an information repo it ry and, with the right platform, b omi g ke enabler of achieving supplier management at speed. Implemented correctly, technology will ensure the “building for longevity” work stream is sustainable whilst “delivering rapid results”. The table below summarises some of the activities that can be streamlined using appropriate technology to impl ment supplier management at speed. Accelerate the process of getting suppliers introduced to supplier management which includes capturing key information, undertaking (or re-validating) due diligence activities, and establishing governance. Supp ier onboarding Accelerate the process of getting suppliers introduced to supplier management which includes capturing key information, undertaking (or re-validating) due diligence activities, and establishing governance. Streamline risk management workflows to identify, manage, and mitigate supplier risks with an auditable action plan. Manage compliance documentation and continuity plans. Risk management Automate scoring and reporting of KPIs to transform performance management into a diagnostic activity that is closely coupled with risk management. SUPPLIER ONBOARDING

Performa ce management Relationship facilitation

RISK MANAGEMENT

Streamline risk management workflows to identify, manage, and mitigate supplier risks with an auditable action plan. Manage compliance documentation and continuity plans. Provide a collaboration portal for stakeholder engagement such as: > Relationship assessments and Voice of the Supplier research - developing and progressing joint account plans. > Value release initiatives and continuous i prove ent actions. > Capture supplier innovation and manage a supplier innovation pipeline. Automate scoring and reporting of KPIs to transform performance management into a diagnostic activity that is closely coupled with risk management. Provide a collaboration portal for stakeholder engagement in activities like: • Relationship assessments and Voice of the Supplier research - developing and progressing joint account plans • Value release initiatives and continuous improvement actions.

PERFORMANCE MANAGEMENT

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Summary T he COVID-19 pandemic has caused many organisations to fully appreciate the fragility of their supply chains and the importance of supplier relationships in improving resilience and having more effective continuity plans. The crisis has also put the spotlight on seven risk areas that typically get overlooked in normal risk assessments. Supplier management is often seen as a time-consuming and intricate activity to implement – something that is achieved over many months, not weeks. However this need not be the case – it is possible to implement supplier management at speed as we have outlined. Although supplier management at speed sounds attractive (and it is), we must issue a word of caution. If the primary goal is to respond to an event that has already happened, there is a huge risk that the whole initiative may be seen as a “flavour of month” programme. This is why we are advocating two work streams to implement supplier management at speed: 1. Building for longevity, so that the programme is implemented in a structured, repeatable, and systematic way, and can deliver value (in many forms) as a business-as-usual activity. 2. Delivering rapid results by putting the emphasis on active supplier collaboration to find and unlock the value that is inherent to the supplier relationships that a business depends on.

The two work streams can be run in parallel but only when both are implemented will supplier management be a sustainable business activity that delivers value. Technology is a vital enabler to implementing supplier management at speed, but this has to go beyond simply being a passive information repository. The seven unanticipated risks highlighted in this paper provide a sobering reminder that protecting supply chains requires strong supplier relationships. In part two of this whitepaper we put forward the Safe Supplier Operating Standard in the format of a checklist for businesses to use with their suppliers – not for audit purposes, but to identify gaps and opportunities, protect their supply chains, and facilitate collaboration.

About the authors

Alan Day is the Chairman and founder of State of Flux, and has led the company from strength to strength since 2004. He has over 20 years’ experience in driving thought leadership in procurement and supply chain best practice.

John Newton is Product Management Director and Head of Learning at State of Flux, and has over 20 years’ experience in major account management, professional services, and supply chain functions.

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