How Group Purchasing Organizations Can Improve the Supply Chain
By Jana Spivey | March 23, 2020
Coronavirus (COVID-19) is the elephant in every single room. Because of the economic impact in China, closed borders and travel bans, the global supply chain that businesses rely so heavily upon has been greatly affected. As a group purchasing organization, we’ve been closely monitoring the situation and have determined ways to improve the supply chain by mitigating the impact to businesses experiencing a reduction in necessary supplies.
How are supply chains being impacted by coronavirus?
First, let’s start with the facts. From February 22 – March 5 the Institute of Supply Management (ISM) surveyed over 600 of its member organizations to ascertain how the outbreak has impacted U.S. organizations and supply chains. Almost 75% of respondents said they had experienced supply chain disruptions in some capacity. Additionally, 60% of firms have experienced shipping delays from China, and 53% are struggling to obtain information from China regarding their supply chain.
As a result, one in six companies has adjusted its revenue targets downwards by an average of 5.6%.
“The story the data tells is that companies are faced with a lengthy recovery to normal operations in the wake of the virus outbreak.”
– Tom Derry, ISM’s CEO
According to Financial Times, ports in the U.S are anticipating a drop in cargo volumes by as much as 20% in the first quarter of 2020, at a predicted cost of tens of billions of dollars. Ports on the west coast have been most affected, with the Port of Los Angeles expecting a 25% drop in February alone.
As the virus spreads across the globe, so too does the panic-buying and stockpiling. Empty grocery store aisles, accompanied by footage of consumers weighed down by dozens of packs of toilet paper, have been reported everywhere from Australia to Europe and the United States. Whether there is a genuine shortage of these products or not, the sudden change in purchasing patterns places an enormous strain on the Just-in-Time supply chains of today.
While globally connected supply chains bring many benefits, they do not accommodate for much (if any) elasticity in the market. There simply isn’t the extra product inventory or capacity to cope with a major disruption. Time constraints and the fact that some products, including toilet paper, are produced from a complex supply network, mean businesses are struggling to keep up with consumer demand.
Similarly, manufacturers are also dealing with the strain caused by factory and plant closures, which is slowing down supply chains and reducing production. For the many U.S. organizations that depend heavily on Chinese factories, it’s a stark reminder that their supply chains are not as resilient as they might have thought. In fact, more than 40% of businesses do not have a plan in place to address supply chain disruption in China.
In the retail sector, for example, approximately 20% of U.S supply chains are dependent on Chinese suppliers. Losses are predicted to hit $700 million from March 9 through to April 20.
As Tom Derry highlighted, “For a majority of U.S businesses, lead times have doubled, and that shortage is compounded by the shortage of air and ocean freight options to move product to the United States, even if they can get orders filled.”
In light of the ongoing trade wars, companies have already been looking to shift their supply chain dependency away from China. But, if China emerges as the first nation to recover from coronavirus, it may be a smart move to stay put.
How can group purchasing organizations improve the supply chain?
Group purchasing organizations can improve the supply chain businesses are currently utilizing. GPOs help those impacted by a reduction in supply by leveraging the power of large-group contracts they hold. Suppliers will inevitably want to maintain their largest contracts during this time of crisis and small to mid-size businesses won’t want to be overlooked. Joining a GPO is a solution for businesses facing crisis due to reduced supply.
We’re lucky to be living in a time when supply chains increasingly offer greater transparency and more collaboration. These are factors that will stand GPOs in good stead for tackling the challenges brought on by COVID-19.
Together, we can do this. In fact, in just the past 12 months, supply chain managers have overcome the impacts of trade disputes, technological disruption, and natural disasters. We’ve picked up a lot of learnings along the way, all of which are now being put to use in the battle to keep supply chains moving amid a global pandemic.
Here are some steps businesses can take to secure their supply chain:
- Establish a crisis-response team that is led by procurement, reports directly to the C-suite and includes representatives from HR, IT, marketing, operations and finance.
- Identify contingency suppliers wherever you are reliant upon a single source supplier.
- Establish the outcome of missing product and marketing deadlines and the legal repercussions of failing to adhere to contractual obligations. Also, develop a new timeline for all launch plans that account for delays and product shortages.
- Forecast the financial impact of coronavirus on your company’s profits.
- Conduct thorough, ongoing risk analyses to stay in the loop on how the virus is spreading. This will help you respond efficiently as the virus spreads.
- Keep your employees safe by limiting travel. Cancel unnecessary meetings and improve diligence when it comes to workplace sanitation.
- Finally, join a group purchasing organization (GPO) to harness the power of the crowd and secure your contracts with key suppliers.
As demand continues to outstrip supply, vendors are increasingly likely to limit the number of customers they deal with. They will understandably choose big players over small businesses. Joining a GPO will help prevent this from happening to your organization.
Peering forward to the end of this crisis, it’s possible that we’ll see a reinvention of global supply chains. Companies are likely to continue shifting production out of China, supply chain risk management will become an enormous priority. Supplier diversity will grow more important than ever.
Ultimately, it’s up to us to use this time wisely – to regroup, to restructure and (when this is all over) to come back stronger than ever before.
As a final reminder to all the sourcing heroes out there, the lights are still on in the Unaverse. We’re here if you need us. Stay safe. You’ve got this!