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Supply chains need some love during the coronavirus pandemic

Thursday 9th April 2020

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Continental, one of the world’s largest car-part makers, sits smack in the middle of many global supply chains. Geographically diversified and relatively well capitalised, the German-listed manufacturer is about as well positioned to survive the coronavirus pandemic as a company in its sector can be. 

Yet its chief executive Elmar Degenhart warned last week that profit margins at its auto division will probably drop to zero and that smaller suppliers were in danger of going out of business. 

History suggests he knows what he is talking about. A Case Western Reserve study of the US auto industry’s experience around the financial crisis found that the total number of suppliers fell from just under 15,000 in 2007 to around 12,000 in 2011. Individual businesses reported that their average number of direct competitors fell from eight to six in the same period.

So far, the sector’s big players have done very little to prevent a repeat, although no one wants to say so publicly. One carmaker told me that it was too soon for his company to step in, because most production lines have only been shut down for two weeks. Another executive said that his company was counting on state aid to keep its suppliers afloat because “we can’t let them continue producing for us if there is no demand from our customers”.

Although corporate leaders have been spouting platitudes about caring about their stakeholders, including suppliers, the story is similar in most other industries. UK retailer New Look has suspended payments for existing stock and cancelled orders. Swedish fast fashion group H&M has tried to do a bit more: while cutting back orders, it is taking delivery of already produced goods without seeking changes to payment terms. “The suppliers, and their employees, are extremely vulnerable in this situation,” H&M said. “We are in a close dialogue with several partners and industry stakeholders . . . with the aim of finding a joint industry solution.” 

Supply chain experts warn that companies may find their level of detachment comes back to haunt them when they want to resume production. “It’s not a matter of just being able to say ‘we can start up again’, but rather finding out who can start shipping,” says Roger Dennis, author of a 2015 report on the impact of crises on supply chains.

He points to the experience of the 2011 floods in Thailand. Factories that had been built to withstand natural disasters, with their own power sources and storm surge protection, ended up becoming literal “islands of resilience because no one could get in or out”. 

Companies should be talking to their suppliers to locate and alleviate potential pinch points ahead of a restart. They also need to rethink the way they view their suppliers, says Bindiya Vakil, chief executive of Resilinc, a supply chain data and management group. Rather than prioritising vendors with whom they spend the most money, they should concentrate on those that supply parts and raw materials that are critical to revenue generation.

Consider personal protective equipment. It is relatively cheap and abundant, so few hospital administrators previously worried about how and where their distributors obtained it. They now know, to their chagrin, that they cannot function safely without it. 

For those critical suppliers, companies should pull out the stops — help them redesign their processes and give them a boost financially, Ms Vakil advises. “Pay early, improve your payment terms, loan money, buy the raw materials for them if they do not have the necessary credit,” she says.

Faced with an extraordinary surge in demand — an enviable problem to have when other sectors are mothballed — UK supermarket chains are already starting to do this. Morrisons has dramatically sped up payments to suppliers with turnover of less than £1m. They are receiving funds immediately, rather than having to wait up to 60 days.

For its part, Tesco is working with suppliers of key products — eggs, milk, sausages and toilet roll — to meet the increased demand from shoppers eating at home. The changes include increased production at farms and dairies all over the UK and simplified ranges. 

Tesco has encouraged dairies to drop one-pint bottles of milk to boost production of more popular two and four pint bottles and cut its toilet roll selection from 33 products to 10. The grocer is also ordering in quantities that fill entire pallets and trucks, to avoid wasting delivery capacity.

Meanwhile, it is also working with its main egg supplier, Noble, to take less popular white-shelled eggs that would ordinarily go to McDonald’s. “We are incredibly grateful for everything that our suppliers are doing to help our customers get the food and essentials they need,” says Andrew Yaxley, Tesco’s chief product officer.

It is obviously more financially rewarding to help suppliers boost output than to support them in crisis. But those smaller vendors will be vital if we are to have any hope of a rapid economic restart. They also can help solve our longer term sustainability problems. Companies must seize this chance to rewrite the rules of engagement. This is not a time for penny-pinching.

Source: Financial Times

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