COVID-19 – How To Protect Your Supply Chain

FAST FACTS:

• There are over 3,800 suppliers in the Achilles Network that are at financial risk if the COVID-19 crisis lasts for more than 6 months

• There over 200 Achilles product and service codes for which more than 30% of the supplier base is at financial risk

• Over 50% of suppliers in the Achilles Network are Micro or Small enterprises

• Cash flow is critical: paying invoices quickly is imperative for ensuring supply chain health

Date: 26 March 2020 |  Time to read: 12 minutes

There is no mistaking that we are living in unique times. Business continuity is front of mind for many businesses, and supply chains will need to flex to accommodate dramatically different demand and working conditions. From operations to workforce management, businesses face unprecedented challenges. At Achilles, we are committed to helping our customers navigate these difficult market conditions. In the regions most severely impacted by COVID-19 infections, Achilles maintains a vast network of pre-qualified suppliers. It is our mission to ensure that we effectively connect buyers and suppliers to ensure continuity of business wherever possible. We are here to help buyers in our network identify sources of compliant supply and to support supply chains by keeping organisations connected and securing business in uncertain times.

In our customer base we have seen significant disruptions already across many sectors. Utilities and construction activities vary widely by country and individual policies. The Oil & Gas sector is also impacted by the market consequences of COVID-19: the decline in oil prices and constrained access to capital have increased downward pressure. The transport sector has been dramatically impacted, with air and rail services cancelled, and significant restrictions on movement of non-essential goods. We are working closely with the buyers and suppliers in our networks to maintain supply networks during this difficult time.

We have carried out a thorough analysis of the Achilles network of suppliers across these sectors, and more. We have identified some products and services that are at high risk of supplier failure if the crisis continues for more than 6 months. In this post, we’ll provide information on our findings and recommendations for how to proactively manage this risk.

We have ranked the impact on countries by the number of cases relative to the population and the actions taken by government to restrict movement. Within those countries, we have looked at suppliers that have a current ratio of less than 1, which means they are at a higher risk of default if revenues are impacted. From this analysis, we have identified a number of products and services for which a large percentage of suppliers are at risk. A few notable examples include:

Many buyers are taking action to ensure continuity of supply for high risk products and services. The biggest issue that we hear in speaking with customers is cash flow. Suppliers are concerned that they will not have enough cash to weather the crisis. Many procurement organisations are working hard to identify where supply is at risk and to put continuity plans in place. Many plans centre around ensuring suppliers are able to survive the crisis financially. Some plans are focused on securing appropriate PPE (Personal Protective Equipment) for staff and contractors. We are helping our procurement customers to identify risky areas and collaborate effectively with suppliers to manage the risk.

Figure 1: Heat map of Coronavirus (COVID-19) ratio of infections to the general population, with numbers of registered Achilles suppliers by region.

Managing a Resilient Supply Chain: What you need to know

According to a recent Deloitte study, the companies best prepared to respond to the event “…have built strong relationships with key suppliers and have put systems in place to provide visibility across the extended supply network to better understand their risks and drive specific actions based on their priorities.”

We can help to identify a network of assured suppliers that can provide key products and services to critical infrastructure and manufacturing supply chains. We are here to help you identify additional sources of supply across our range of global Communities representing Mining, Oil & Gas Extraction, Utilities, Construction, Transport, Manufacturing, and Consumer Goods.

The first step in managing a resilient supply chain is in identifying risk hot spots.

1. Getting Through it Together: Proactively reach out to suppliers who might be at medium term risk if the crisis continues for more than 3-6 months and take steps to support them through this crisis.
2. Understanding Risk: Identify and analyse sources of supply chain risk and maintain appropriate policies relating to shortages or other supply chain disruptions that are likely to occur during the crisis.
3. Identify additional sources of supply: As some suppliers will be more affected than others, it is important that you have identified additional sources of supply that can be leveraged quickly if your existing supply base is unable to deliver. Proactively qualifying suppliers is a positive step you can take to mitigate against disruption.

Getting Through it Together

We have identified that there are over 3,800 suppliers in our global network that are at high risk of financial default due to containment efforts related to COVID-19. These suppliers are based in affected areas and have a liquidity ratio of less than 1, which means many will quickly run into cash flow issues if revenues are materially impacted for a period of 6 months or longer.

As well, many of the suppliers in the Achilles network are SMEs. In fact, nearly 56% of Achilles registered suppliers in the most heavily affected areas are Micro or Small enterprises. Many of these suppliers will need extra help managing throughout the crisis. More than 4,000 suppliers in the Achilles network only provide one product or service and are at particularly high risk of impact in the case of lock-down or demand disruption. It is critical that buying organisations that rely on these suppliers identify ways of working together that will see these small or niche suppliers through the crisis.

It is imperative that during these difficult times, buyers keep money flowing into the supply chain. It may seem counter-intuitive, but the worst thing purchasing organisations can do is restrict cash flow, as it will put undue pressure on the supply chains. The simplest option is to reduce payment terms to ensure suppliers have enough cash flow to stay afloat during this time. These can be directed at suppliers identified as experiencing financial duress, or towards product and service categories that are disproportionately affected. As well, many organisations retain 5% of contract value until completion. Procurement organisations can consider relaxing this policy in uncertain times to ensure adequate cash flow to suppliers. Alternative contract or payment arrangements, cash injections based on future delivery, or acquisition may be additional tools to consider deploying if these goods and services are critical to supply chains and your sources find themselves in distress.

Figure 2: At Risk Suppliers in the UK, supplying the Utilities Sector

We have a long history of working with our customers to manage supply chain crises. In 1998, our Oil & Gas Communities were rocked hard by an oil price shock. We supported our supply chain customers through this crisis by working collaboratively with the oil companies and their suppliers. The dramatically low oil price – below $10/barrel – had a severe impact on the industry. Literally a “generation of oil industry professionals” was lost in the turbulence. To protect the industry it was important to maintain, as much as possible, the skills, competence and capacity of the institutional base. We knew that after the crisis there would be strong demand for these resources again. We took an active role in managing relationships to support this throughout the crisis – providing much needed flow of information between procurement organisations and critical suppliers. In many cases, we were in daily contact with suppliers, and helping to raise awareness of business critical issues for the industry. Whilst the number of suppliers was reduced quite significantly over a period of time, some 75% of the supplier base remained visible and up-to-date on the Achilles database, and thus the oil companies maintained a relatively healthy pool of suppliers to engage when the crisis was over.

Understanding your risk

Our business continuity questions and responses can inform you of procedures suppliers have in place to manage in times of crisis. Often, what makes a supplier critical depends on a number of factors: procurement spend with that supplier; the existence of alternative sources of supply; and risk typically form the foundation on which a determination of supplier criticality is built. We have a long history of working with purchasing organisations to stratify the supply base and provide the appropriate level of assurance for each supplier, depending on the amount of risk that supplier introduces to the supply chain.

For example, in the Utilities and Construction sectors, many purchasing organisations classify risk based on the type of service a supplier provides. For example, if a supplier will be working at height, or must come on to site to install a product or deliver a service, that supplier might be classified as “high” risk. These suppliers working in geographies affected by COVID-19 will almost certainly be impacted by restrictions in the movement of employees. In addition, many organisations are facing challenges in securing appropriate PPE for staff and contractors, leading to a number of health and safety “judgement calls” on site, which introduces additional supply chain risk. It is important that organisations have clear policies in place that outline how safety issues can be managed in the face of a shortage of PPE or other safety equipment.

Additional Sources of Supply

We have a network of over 175,000 suppliers that can quickly mobilise to gain compliance with your requirements. Our Insights team works regularly with buyers to discover additional sources of Assured supply that can be leaned upon to fill the gaps when existing suppliers are disrupted. This provides a healthy network of alternative supply for buyers and alternative demand for suppliers. We offer a range of virtual events and online networking materials that bring these buyers and suppliers together.

In response to the COVID-19 crisis, we carry out extensive analysis of our supplier network. We have found that of the more than 10,000 products and services our member suppliers provide, 95% of them can be sourced from suppliers based in alternate geographies.

However, there are some products and services whose supply we expect to be disproportionately impacted. These include products and services with limited geographic distribution of supply; a concentration of suppliers in areas heavily impacted by COVID-19 infections; and a high proportion of suppliers with a low liquidity ratio².

Looking at product and service codes this way, we find over 200 products and services are high risk for supplier insolvency impacting supply. A summary table is included below. For these codes, more than 30% of the suppliers that supply them to COVID-19 impacted areas have a liquidity ratio < 1.

Table 2: Product Category Risk

Note: The “Registered” column represents the number of suppliers registered with Achilles, based in countries that are significantly impacted by COVID-19. The % of Suppliers Likely Impacted is the percent of that total that have a current ratio of less than 1 in their latest accounts provided to Achilles.

This means that if the commercial impact of COVID-19 containment measures goes on for more than a few weeks, a high proportion of the suppliers providing these products and services will come under intense financial pressure. If your business relies heavily on any of these codes, we recommend securing multiple sources of supply.

Conclusion and Recommendations

There will no doubt be a number of lessons we can learn from this crisis. Many are predicting it will mark a shift in the way employers think about working remotely, and a transformation in the way we deliver goods and services. At Achilles, we are acutely aware that after each supply chain crisis, we see a spike in demand for Supply Chain Visibility projects. Whether it is identifying critical pinch points in the supply chain or identifying alternative sources of supply, the best time to map out your supply chain is always yesterday. Most supply chain mapping solutions take too long to be deployed during a crisis but are sorely needed when crises arise. Now is a good time to think about how you manage visibility in your supply chain – for critical Tier 1 suppliers and beyond. We are here to help you with these projects, and our customer teams are well prepared to assist you in navigating this process and understanding the art of the possible when it comes to mapping your supply chain

As we have outlined here, we recommend procurement organisations:

1. Work with suppliers to keep cash moving through supply chains and maintain business continuity
2. Identify risk and have appropriate policies in place to manage it effectively
3. Establish alternative sources of supply with a larger pool of compliant suppliers

We have a range of unique solutions to help you drive visibility in your supply chains, and we have a proven track record of supporting supply chains through past crises. We are maintaining a COVID-19 website in which you can find useful resources, and regularly updated content. Our customer facing colleagues are here to help you apply the recommendations outlined here.