During a recession it is often thought buyers of services and goods, especially those with solid financials can name the tune when dealing with suppliers. It is perceived that when the market contracts that suppliers become even more competitive than usual as they seek to survive. The term a buyers-market is bandied around in all sorts of situations. Conventional thinking suggests that suppliers need longer contractual commitments that ultimately can allow them to plan ahead for the future, and in particular access capital to ensure their businesses stay solvent. And in return buyers with order books look to improve terms across in particular the price paid, and the ultimate cost.
The reality is somewhat different.
And having faced an unprecedented (in modern times) pandemic and recession globally it is unclear what will happen across each industry and sector. However, at Odesma, we are seeing a range of situations arising that are not necessarily what would be expected during these times.
With a buyers hat on, the first reaction expected is that the board or executive of businesses would clamour for cost reduction from the in-house procurement team. The focus being on shoring up the financials, the reality is that the exco’s focus is elsewhere on keeping the business going in the face of staff absence & welfare, new work routines, keeping customers happy, risk management, delivery stability and so forth. And want procurement to ensure suppliers deliver, and worrying about price/cost is lower on the list. We are seeing this across a variety of sectors, especially manufacturing & utilities, where production outages in the supply base push procurement resource towards managing (expediting) supply as a priority. A range of our customers and contacts have discussed supply shortages and supplier de-commits, which are likely due to production breaks due to Covid19. The UK has a significant reliance on Mainland European manufactured goods and components.
This has also been particularly prevalent where an organisation is driving to a Low-Cost Country Sourcing strategy. We have seen, recently that these arrangements have become under increasing strain even when the remote suppliers have formal contracts and pre-payment in place.
Another trend we have observed is the need to move away from single source situations with key/strategic suppliers. Supply chains have become under the greatest pressure, over the past few months, many products in the direct and raw materials area have gone into a “allocation situation” which puts increasing pressure on the supply chain – especially when single sourced and the downward spiral of product availability begins. Hence, we have seen a rapid approach to secondary sourcing to try and mitigate risks.
From a supplier perspective a range of services sector organisations, especially creative are now suggesting that they will not be able to cope with an up-tick in demand as we emerge from lockdown. Marketing agencies are suggesting that they will be selective in who they work with as we return to normal as they will not be able to cope with demand, especially as they will also be staff constrained as they emerge. The over-riding suggestion is that customers will have to sell themselves to an over-whelmed supplier base to secure commitment and time.
The theme is the same for technology providers, the stratospheric growth of Zoom and others is the tip of the tech iceberg. Consequent demand for cloud storage and on-premise space, as well as security software coupled with a workforce increasingly based from home has pushed demand through the roof. This has led to power not being with the buyer normally in a recession, as would be expected, but towards the providers.
These are but three examples, but we are hearing of increased demand for everything from motor vehicles to bricks to sand!
In addition to the above pressure’s suppliers are finding that the “usual” terms of trading are changing to try and optimise the financial supply chain between both parties. There is a daily plethora of late payment stories across the board as buyers try to use suppliers to fund the pressures on their own cash flow.
However, savvy suppliers are using this as a USP and to their advantage. We have seen numerous examples of suppliers allowing buyers to extend their payment terms and work with customers to ease any immediate financial burden – this is already proving beneficial to both parties and allowing the suppliers to forge stronger partnerships with their customers in their time of need.
We are also seeing an increase in demand for a broader range of capability as businesses ask Procurement teams to address issues associated with supply risk and instability in the inbound supply chain. Skills such as supply chain mapping, risk assessment, mitigation and scenario planning, which may have traditionally been considered ‘supplementary’ to commercial capabilities are coming to the fore. A lack of development in these areas is leading to skills shortages in procurement. So what is the answer…..there is clearly a massive need to understand exactly the state of play with the supply base, understanding risks and financial strength to ensure your business secures continuity of supply and commitment. Beneath this is clarifying which areas of spend are in most need of support, and which will see a power shift towards the supply base. The response must be situational, and react to what is seen in the market. However we believe that those that navigate the current situation best are those organisations also promote themselves to their suppliers as a customer of choice (referred to as Procurement marketing) and maintain strong communication with their key and critical suppliers. Whilst also listening to what is shifting in their supply marketplace.