PROCUREMENT IN THE PANDEMIC
In the second part of the Special Expert Feature of Procurement Focus, the next Expert member of our panel is Murray Ambler-Shattock. Murray is the Strategic Operations Manager for K M Plant Hire & Groundworks Limited. As well as a distinguished career in the industry, Murray has numerous professional recognitions, including qualifications, awards and certified status.
When we asked Murray how he thought Procurement was going to be affected by the Pandemic, not only did he come back to us with his predictions, he also reached out to a number of his colleagues from the wider supply chain and industry sectors. Here Murray shares with us their insights into what is happening;
Rishi Sunak has advised that a quarter of businesses have stopped trading and some four million employees are now furloughed, and that around two thirds of SMEs do not have access to enough resources to survive a prolonged lockdown. Indeed, some smaller and micro businesses are now already at a point, where they have exhausted all financial reserves, and at the end of April, will have crossed a financial rubicon, where they cannot see a way forward due to the absence of adequate and prompt enough financial aid. Some advise they are considering the perceived lesser-damaging outcome of letting their business fail, in order to restart again in hopefully better future times, rather than incur insurmountable debt, struggle and fail. Many cite the failure of CBILS to deliver a viable rescue solution as being the final straw. BBLS is welcome but may be too little, too late.
After speaking with many external colleagues, most advised their organisation had been forced to decrease production activity significantly due to the ongoing COVID-19 Pandemic situation. Roughly a quarter had now ceased working entirely and had already, or are about to, furlough a significant number of employees. This is a snapshot of what is happening in businesses, not just up and down the UK, but indeed, right across the globe.
A significant number (approximately two thirds) of my Procurement and Supply Chain Management contacts advise they believe the effect and impact of COVID-19 on businesses, in general, is becoming ever more severe. As a result, many organisations have autonomously lengthened payment terms to preserve cash flow, and around half have already completely suspended all payments to their suppliers to protect cash reserves.
Very few businesses have been able to sustain shortened payment times, and if they had initially undertaken this in response to Government advice, they have now ceased this due to them not experiencing prompt payments from their clients/customers. Where this has been undertaken and maintained, it has generally been to core/Directs or mission critical suppliers, rather than Indirects, and in response to usual terms being lifted and/or priority being given to cash paid orders over credit term orders. Suppliers have advised they can no longer provide any credit to anyone, as their Trade Credit Insurance has been rescinded, and unless a new customer pays upfront, they can’t fulfil supply. Indeed some are even seeking Director or personal guarantees for even trivial spend. Without doubt, suppliers of all sizes, will be severely restricted without the protection Trade Credit Insurance provides.
From those I have spoken with, a third have sourced alternative suppliers in response to the supply chain disruption. This can deliver new opportunities for suppliers to acquire new business, by providing goods and services unavailable from the previous supplier, thusly replacing them. Many are collaborating, or looking to collaborate, on buying activity and logistics to keep things moving. Some suppliers cannot get materials, and their clients are helping them with support on this, even in the form of payment assurances or guarantees.
Most supply chains are currently paying more or expect to pay more for materials, goods and services as a result of this crisis; commonly increases are around 15-20% across the board and a minority stomaching increases of up to 50% on niche products and services. Concerns of profiteering are abound, although often the supplier has themselves faced spiralling costs. If proven, that the supplier has behaved inappropriately in the present situation, the intention amongst some is to cease future dealings. Every action during these times, is a communication event, and sends a message out that will reverberate long after this crisis alleviates.
Much like the business I work for, many organisations have been forced to adapt and respond quickly to the rapidly evolving and ever-changing situation during this crisis. A minority have elected to diversify into other goods and services in response to the COVID-19 PPE crisis, for example, and some confirm they have had to react and branch out just to remain in business. Some have been disappointed to learn there’s no apparent desire to take up their produced PPE.
Some larger firms have shuttered their payment departments, leaving an engaged tone on the ‘phone lines and auto-responder email replies and furloughed the personnel.
A number of suppliers seem to have simply closed up, in that they are uncontactable and non-responsive to existing customer enquiries. Their employees advise they have been furloughed, and therefore cannot deal with any enquiries, but are struggling themselves to contact anyone at the business to assist. This is leading to fear that despite being told they’ve been furloughed, in reality, they have been marshalled into a siding ready to be let go. There also seems to be many concerns relating to the furlough scheme, for both businesses and individuals, in terms of when such funds will arrive and if they will be paid in full or not.
There are many conversations taking place surrounding the support that is available for businesses, the unsuitability of CBILS and the hope that BBLS will prove more successful. There are many concerns about incurring debt in uncertain future trading conditions. Relationships with suppliers, finance providers, service providers, and insurance companies are becoming somewhat tense and indeed, completely breaking down in some cases. I am also aware of many instances in which payments to suppliers are being cancelled, without warning, with the business deciding to wait for the supplier to get in touch and then re-negotiating a better deal. Threats of Contractual Non-Performance Disputes and Legal Action, rejection of Force Majeure clause execution, declined Income Loss Insurance claims, etc., plus fears of a potential explosion in bad debt and credit terms defaults abound.
There is a consensus that we are expecting measures of some form to remain in place for several months, and businesses are preparing for the long haul. On a positive note, most of my Procurement contacts have confirmed they will be seeking to reward existing reliable suppliers and any alternative suppliers that have delivered in a crunch. They will also aim to retain those alternative suppliers that have come through for them in this crisis, as the preferred suppliers of the future, no doubt until price becomes the defining factor again. I am also taking this approach with the suppliers we are working with; to maintain and develop relationships and replacing uncooperative suppliers with more engaged ones. I am a great believer in a fully engaged and collaborative Supply Chain partnership.
The collaboration efforts that are taking place now, may continue long after the effects of COVID-19 start to ease, as this is, in many ways, a catalyst for a sea change in thinking and a new era for a more intelligent and considered Procurement Strategy.
While I speak with a great number of professionals from across the wider Supply Chain, there are going to be businesses that have not faced the same challenges as others. I believe the diverse nature of the organisations I do speak with has allowed me a great insight into how COVID-19 is not only affecting Procurement, but also the more extensive supply chain.
Financial Risk Management will become an ever more crucial element in enabling businesses to trade safely and evaluate the risk of impending bad debt. In 2019, there was some £4.3 Billion of identified bad debt in the UK. Early economic modelling predictions suggest that as a result of Covid-19 impacts, this could double to over £8 Billion during 2020, and continue to increase through 2021 and 2022 before levelling off. The direct impact of this on any business in the UK should not be underestimated. If a supplying business is an unpaid Creditor at the point of that customer/client entering Administration, as a trend, they are 3 times more likely to file for Insolvency themselves in the subsequent 12 months. Therefore, it’s vital to not only seek available insurances against this risk (TCI) but to also identify such risks early enough through accurate Fintel to mitigate your risk exposure through early identification of any triggers. On identifying the confirmed signals of financial distress, any provided credit terms can be reviewed, financial exposure can be reduced and managed, and liaison can commence for onward management of their account.
Responsible Risk Management, intelligent and agile Supply Chain Management, responsive collaborative interactions will be the wire-frame around which better Procurement practices will be developed and implemented going forwards, and this can only be good for the profession.
The next few months are certainly going to be interesting for us all. I have no doubt that the Procurement sector is up for the challenge and will meet it admirably.
Murray Ambler-Shattock, Strategic Operations Manager.
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