Requalifying Your Suppliers
Test: As the coronavirus pandemic eases, the economy will roar back to life as millions emerge from lockdown, get back to work and start buying things again. That’s the narrative we’d all like to believe anyway.
In reality, the restart is going to be much more complex than that. We can’t just flick a light switch and expect a quick return to pre-Covid-19 consumer patterns and company supply chain efficiencies. The task facing many companies emerging from months of paralysis is more comparable to rewiring the whole house.
Companies need to consider a range of factors before they ramp up production again, including the readiness of their suppliers, their logistics capacity, and changes in consumer-buying behavior. All of that while dealing with continued uncertainty over whether the virus could come back in waves until a vaccine is ready.
Before ramping up their operations, companies first need to have confidence that their own suppliers are ready to meet the demand. They can’t just issue purchase orders and expect business as usual.
A lot could have changed for suppliers during the pandemic. Continuing social distancing rules could affect their assembly line capacity. Perhaps they had to accept additional lending that has left them at more precarious debt levels. Maybe some of their own suppliers are in trouble or have gone out of business, raising doubts over their capacity to produce.
Verifying that suppliers are in shape to meet your requirements requires going through a process of re-qualification for each one. It’s important to know details like their cash position and working capital in order to be confident in their ability to sustain production.
Questions need to be asked about the state of their own critical suppliers and what steps they’ve taken to ensure they have the raw materials necessary for production. To be able to restart production by a certain date, companies need to have their supplies up and running well in advance to build inventory.
A company in the metal-stamping industry, for example, would need to work with their steel suppliers to make sure they have the grades and quantity they need. They’d need to know how much is sitting in warehouses versus in processing plants, as well as checking on the viability of third-party plating processors.
Companies selling to USA should use this supplier re-evaluation process to help them prepare for another big upcoming disruption - the USMCA trade deal that replaces NAFTA on July 1. The new deal imposes complex country of origin and labor rate standards that will require companies to have transparency into their entire supply chain.
This advice doesn’t only apply to domestic operations. If you do business with companies overseas or have divisions overseas, be sure to dig deep enough to understand all the same risks even with foreign sub suppliers.
The scrutiny doesn’t just go in one direction. Manufacturers need to be prepared for similar questions from their own suppliers, who will have concerns about their viability. It’s quite likely that suppliers that had previously been happy to be paid on credit will now want payment in advance or more immediate financing to ensure their own well-being.
That can be a problem because starting up operations tends to be a drain on working capital as companies have to start paying suppliers again.
Companies also need to re-assess their logistics for getting products to consumers. Those who rely heavily on air freight, such as chipmakers, will have a lot less capacity to get things moved unless airlines start ramping up their flights again.
The final and most unpredictable part of the reopening puzzle is consumer demand. In an ideal world, consumer spending will come back with a bang, reflecting pent-up demand from months in lockdown. But there are a lot of reasons to think that won’t be the case, given the likelihood of lingering wariness over physical shopping, traveling, eating out, and working in offices. In addition, there may be shifts in consumer buying patterns post-Covid-19 that are impossible to predict.
In this environment, companies are going to have to be nimble and smart in how they restart production. Building up inventory that consumers aren’t ready to buy will be a waste of money. Instead, companies are going to have to work as close to a just-in-time production model as possible, ready to ramp up or scale back production depending on demand.
If all this seems overwhelming, it’s because it is. Rather than rushing back into relationships with suppliers, it’s advisable for companies to slow things down and take a methodical approach to ensure they get their re-opening right.