Responding to COVID-19 Supply Chain Risks—Insights from Supply Chain Change Management, Total Cost of Ownership and Supplier Segmentation Theory
Abstract
:1. Introduction
“To say that everything changed is an understatement. Before the COVID-19 pandemic struck, supply chains were lauded for their ultra-efficient, single-source and just-in-time capabilities. Now, the logistics field will need to construct entirely new levels of supply chain resilience.”
“Resilience is around sourcing, where do you get your products from? How many markets do you source from?” (https://www.supplychaindive.com/news/unilever-csco-agility-forecasting-coronavirus/581323/)
2. Guidance from Literature
2.1. TCO
2.2. Kraljic Supplier Segmentation
2.3. Supply Chain Change Management
- -
- The need to prepare for the long run as change processes tend to take an extended period of time to fully implement throughout the supply chain
- -
- Approaching change as a journey of discovery as there tends to be a fair amount of learning that needs to take place during the change process and no upfront clear cut templates fully apply
- -
- The need to approach change integrative across functions but recognize that not all change needs full integration and selective cross-functional engagement may suffice.
3. Method
3.1. Justification of Method
3.2. Explanation of Method Used
- (1)
- A personal invitation to engage in our research was emailed to participants including a clarification of the objectives and focus of the research. Interestingly enough, all contacted managers agreed to participate. The combination of the use of a personal network, the importance of the topic and the relevance of the research appear to drive very high levels of industry engagement. Perhaps there are some implications for researchers in this and we will revisit this later.
- (2)
- As a next step, participants were sent research questions in advance of the interview to help them prepare.
- (3)
- The interviews were semi-structured using the questions from the interview protocol listed in Table 2. Interviews were conducted over video-conference given the inability to travel and the “work from home” environment.
- (4)
- After that the interviews were documented and coded by the interviewer.
- (5)
- These notes were shared back with participants and quotes were also shared seeking feedback on the correctness of documentation and any possible missing points from the conversation.
3.3. Overview of Qualitative Dataset
4. Findings
“When the tariffs kicked in, we accelerated supply base diversification to reducing our reliance on Chinese sources. We included suppliers in India for example. When China went into shut down because of COVID-19, we were able to shift orders from Chinese suppliers to those new suppliers in India and Southeast Asia. By the time India and Southeast Asia went into shutdowns Chinese suppliers where back up and running so we could shift orders back to China. This gave us a huge dividend on our diversification efforts,” Procurement director.
“Digitization does not help in the short term, if it will help in the future, we will see” Logistics manager.
“Sourcing product domestically can be 2X our manufacturing cost in China but with demand right now customers are willing to pay extra to get it a bit faster.” Head of the supply chain.
“We reduce from net 60 days payment terms to paying upon shipment so that suppliers could use the early payment to secure material in the market and turn to our next order right away. We are doing what we can on our end to get priority and ensure supply.”
“We learned that a fair amount of spare capacity in the system can be very beneficial when you are disrupted and that is something we need to consider in our future supply chain design.” Chief procurement officer.
“Our teams went back to excel to plot out forecasting scenarios when we were just not getting good forecasts from the commercial teams. It is understandable that it is hard for these teams to forecast in this environment but we needed to get going and so we ran with it.” Chief procurement officer.
“Our supply-base is somewhat Asia-heavy and we need to reconsider that. If I am missing 1 out of 4000 parts in a product I do not have a finished product.” Director of procurement.
“We have a tendency to focus on current issues and let past issues slip to the background of our efforts and this might mean that we never get to make some of the harder changes or learn some of the more difficult change lessons to be learned.” Director of procurement.
“There is a lot of hard work ahead of us still.”
“In the beginning of quarantine, negotiations about payment terms played a decisive role to recovery our cash flow” Supply chain manager.
5. Discussion
5.1. TCO
5.2. Supplier Segmentation
“We are worried that when we need to ramp volume back up the suppliers may not have the capacity or capability to do so anymore.”
5.3. Supply Chain Change Management
6. Implications for Managers and for Research
- -
- The need to reconsider the respective weight assigned to factor costs in supply chain design,
- -
- The need to reduce the reliance on a single design (with highly concentrated supply from a limited source) and to consider these not just in the short term but also over time and in relation to service and revenue considerations,
- -
- The active utilization of payment terms as a mechanism to enable bottleneck and strategic suppliers in their upstream efforts to meet the supply needs of customers, while bearing in mind that this mechanism may not translate to further upstream payment terms for tier 2 and 3 suppliers,
- -
- The relevance of focusing on supplier management so that when supply chain risks require collaboration, the relational foundation and capability is in place,
- -
- The need to plan for the long run and for a longer journey of discovery that does not need to involve all peer functions but should involve key suppliers.
“It is important that we have research that helps us connect the dots.”
- -
- While the purchase price is not to sole cost consideration as suggested by TCO theory, it does remain crucial; will the shift in favor of alternative sources nearshoring and in market sourcing be permanent or partial to those companies that face growing demand and customer willingness to pay higher prices or temporary until log costs normalize again?
- -
- How to balance TCO frameworks, traditionally used to make longer-term investment decisions, to very dynamic supply chain circumstances?
- -
- How to ensure that they can be balanced with the relevance of non-cost factors such as customer satisfaction?
- -
- How to approach supplier segmentation as a more dynamic approach in which suppliers may change position in the segmentation,
- -
- And how to evolve supplier relationships over time, accordingly?
- -
- What, beyond payment terms, are other mechanisms that can be used as part of collaborative efforts and
- -
- How to consider that collaborative efforts with tier 1 suppliers may not be matched with those with tier 2 and 3 suppliers?
- -
- To what degree can existing suppliers be part of the process to diversify the supply base geographically vs. are companies going to decrease the relevance of collaboration with these suppliers by introducing alternative sources of supply?
- -
- How to consider the human factor in the change process involved in derisking the supply chain in response to COVID-19; how to manage with empathy across the supply chain and how to balance goal orientation with empathy in times of disruption?
- -
- What talent management tools will be most effective short-term (communication and empowerment?) and longer-term (training and new role definitions?)
7. Conclusions
Funding
Conflicts of Interest
References
- Van Hoek, R. Research opportunities for a more resilient post-COVID-19 supply chain-closing the gap between research findings and industry practice. Int. J. Oper. Prod. Manag. 2020, 40, 341–355. [Google Scholar] [CrossRef]
- Mena, C.; van Hoek, R.; Christopher, M. Leading Procurement Strategy, 2nd ed.; Kogan Page: London, UK, 2018. [Google Scholar]
- Handfield, R.B.; Graham, G.; Burns, L. Corona virus, tariffs, trade wars and supply chain evolutionary design. Int. J. Oper. Prod. Manag. 2020. [Google Scholar] [CrossRef]
- Kraljic, P. Purchasing must become supply management. How managers can guard against material disruption by formulating a supply strategy. Harv. Bus. Rev. 1983, 61, 107–117. [Google Scholar]
- Van Hoek, R.; Johnson, M.; Godsell, J.; Britwistle, A. Changing chains: Three case studies of the change management needed to reconfigure European supply chains. Int. J. Logist. Manag. 2010, 21, 230–250. [Google Scholar] [CrossRef]
- Ketchen, D.J.; Craighead, C.W. Research at the intersection of entrepreneurship, supply chain management, and strategic management: Opportunity highlighted by COVID-19. J. Manag. 2020, in press. [Google Scholar] [CrossRef]
- Pournader, M.; Kach, A.; Talluri, S. A review of the existing and emerging topics in the supply chain risk management literature. Decis. Sci. 2020, 51, 867–919. [Google Scholar] [CrossRef]
- Fawcett, S.E.; Ellram, L.M.; Ogden, J.A. Supply Chain Management: From Vision to Implementation; Prentice Hall: Upper Sadr River, NJ, USA, 2007. [Google Scholar]
- Ellram, L.M.; Siferd, S.P. Total cost of ownership: A key concept in strategic cost management decisions. J. Bus. Logist. 1998, 19, 55–84. [Google Scholar]
- Ellram, L. A taxonomy of total cost of ownership models. J. Bus. Logist. 1994, 15, 171–191. [Google Scholar]
- Ellram, L.M.; Siferd, S.P. Purchasing: The cornerstone of the total cost of ownership concept. J. Bus. Logist. 1993, 14, 163–184. [Google Scholar]
- Ellram, L.M. Total cost of ownership: An analysis approach for purchasing. Intern. J. Phys. Distri. Logist. Manag. 1995. [Google Scholar] [CrossRef]
- Ellram, L. Total cost of ownership: Elements and implementation. Intern. J. Purch. Mat. Manag. 1993, 29, 3–11. [Google Scholar] [CrossRef]
- Ferrin, B.; Plank, R.E. Total cost of ownership models: An exploratory study. J. Supply Chain Manag. 2002, 38, 18–29. [Google Scholar] [CrossRef]
- Hasan, R.; Moore, M.; Handfield, R. Addressing social issues in commodity markets: Using cost modeling as an enabler of public policy in the Bangladeshi apparel industry. J. Supply Chain Manag. 2020. [Google Scholar] [CrossRef]
- Padhi, S.S.; Wagner, S.M.; Aggarwal, V. Positioning of commodities using the Kraljic portfolio matrix. J. Purch. Supply Manag. 2012, 18, 1–8. [Google Scholar] [CrossRef]
- Hesping, F.H.; Schiele, H. Matching tactical sourcing levers with the Kraljic matrix: Empirical evidence on purchasing portfolios. Int. J. Prod. Econ. 2016, 177, 101–117. [Google Scholar] [CrossRef]
- Boffelli, A.; Golini, R.; Orzes, G.; Dotti, S. Open the box: A behavioural perspective on the reshoring decision-making and implementation process. J. Purch. Supply Manag. 2020, 26, 100623. [Google Scholar] [CrossRef]
- Mena, C.; Melnyk, S.A.; Baghersad, M.; Zobel, C.W. Sourcing decisions under conditions of risk and resilience: A behavioral study. Decis. Sci. 2019, 51, 985–1014. [Google Scholar] [CrossRef]
- Geer, B.M.; Ford, M.W. Managing change in supply chains: A process comparison. J. Bus. Logist. 2009, 30, 47–63. [Google Scholar] [CrossRef]
- Frankel, R.; Bolumole, Y.A.; Eltantawy, R.A.; Paulraj, A.; Gundlach, G.T. The domain and scope of SCM’s foundational disciplines—Insights and issues to advance research. J. Bus. Logist. 2008, 29, 1–30. [Google Scholar] [CrossRef]
- Harrison, A.; van Hoek, R.; Skipworth, H. Logistics Management and Strategy; Pearson Education: London, UK, 2014. [Google Scholar]
- Ho, W.; Zheng, T.; Yildiz, H.; Talluri, S. Supply chain risk management: A literature review. Intern. J. Prod. Res. 2015, 53, 5031–5069. [Google Scholar] [CrossRef]
- Rao, S.; Goldsby, T.J. Supply chain risks: A review and typology. Intern. J. Logist. Manag. 2009, 20, 97–123. [Google Scholar] [CrossRef]
- Singh, S.; Kumar, R.; Panchal, R.; Tiwari, M.K. Impact of COVID-19 on logistics systems and disruptions in food supply chain. Intern. J. Prod. Res. 2020, 1–16. [Google Scholar] [CrossRef]
- Ivanov, D. Predicting the impacts of epidemic outbreaks on global supply chains: A simulation-based analysis on the coronavirus outbreak (COVID-19/SARS-COV-2) case. Transp. Res. Part E 2020, 136, 101922. [Google Scholar] [CrossRef] [PubMed]
Theories Considered | Anticipated Implications of COVID-19 Impact on Supply Chains Based upon Theory Considered | Selected References |
---|---|---|
TCO | Beyond purchase price delivery and other logistics costs become more important supply chain cost consideration | Ellram (1993); (1994); (1995); Fawcett et al. (2007); Handfield et al. (2020); van Hoek (2020); Hasan et al. (2020) |
Negative TCO impact of the pandemic makes low-cost country sourcing less favorable | ||
Supplier segmentation | Pandemic has driven a greater supply risk focus; more bottleneck and strategic suppliers | Kraljic (1983); Padhi et al. (2012); Hesping and Schiele (2016); Handfield et al. (2020); van Hoek (2020) |
Collaboration and ensuring supply focus of growing importance over cost competition | ||
Supply chain change management | Change may take an extended time window | Frankel et al. (2008); Geer and Ford (2009); Van Hoek et al. (2010); Harrison et al. (2014); Mena et al. (2019); Pournader et al. (2020); Boffelli et al. (2020) |
Need for learning during the change process | ||
Cross-functional engagement important but potentially limited to a few functions |
TCO | Are you considering factors beyond purchase price more or less in the current environment? |
How is supply chain design being reconsidered in the current environment? Are you considering more near shoring and local sourcing? | |
Supplier segmentation | How are you engaging suppliers in your risk management efforts? |
Are you seeking collaboration, focusing on ensuring supply focus? Are you more or less focused on payment terms and cost competition? | |
Supply chain change management | What changes are you able to make short term? |
What changes are you targeting for the mid- to long-term? | |
Do you have a pre-developed approach or is there a degree of discovery needed in de-risking the supply chain? | |
Which other parts of the company are involved in those changes? |
Company 1 | Company 2 | Company 3 | Company 4 | Company 5 | Company 6 | Company 7 | |
---|---|---|---|---|---|---|---|
Industry | Tools and DIY products | Electronics | Fittness and outdoor equipment | Vision products | Aerospace | Flooring | Wood products, tiling and sanitary products |
Supply chain position | Manufacturer | Distributor | E-commerce company | Manufacturer | Manufacturer | Manufacturer | Manufacturer |
Geography | USA | Middle East | USA | USA | Europe | USA | Latin America |
Company size | Small–medium size | Medium-sized | Small-sized | Large-sized | Large-sized | Medium-sized | Large-sized |
Respondent title | Head of supply chain | Head of logistics | Head of supply chain | Head of procurement | Head of procurement | Head of supply chain | Supply chain manager |
Company 1 | Company 2 | Company 3 | Company 4 | Company 5 | Company 6 | Company 7 | |
---|---|---|---|---|---|---|---|
Beyond purchase price delivery and other logistics costs become more important supply chain cost consideration | ++ | +++ | ++ | +++ | +++ | ++ | ++ |
Negative TCO impact of the pandemic makes low-cost country sourcing less favorable | +++ | - | ++ | ++ | ++ | ++ | + |
Pandemic has driven a greater supply risk focus; more bottleneck and strategic suppliers | + | + | ++ | ++ | + | ++ | - |
Collaboration and ensuring supply focus of growing importance over cost competition | +++ | ++ | +++ | + | + | +++ | - |
Change may take an extended time window | +++ | +++ | +++ | ++ | ++ | + | ++ |
Need for learning during the change process | ++ | ++ | + | +++ | ++ | ++ | ++ |
Cross-functional engagement important but potentially limited to a few functions | + | + | ++ | +++ | + | ++ | + |
Company 1 | Company 2 | Company 3 | Company 4 | Company 5 | Company 6 | Company 7 | |
---|---|---|---|---|---|---|---|
Initial purchase price | ++ | ++ | + | ++ | |||
Operating costs | + | + | |||||
Quality | |||||||
Logistics | +++ | +++ | ++ | +++ | ++ | +++ | ++ |
Technological advantage | |||||||
Supplier reliability and capability | +++ | ++ | ++ | ++ | ++ | ++ | |
Maintenance | |||||||
Inventory costs | ++ | + | ++ | + | ++ | ||
Life cycle | |||||||
Customer-related (satisfaction, etc.) | ++ | ++ | +++ | ||||
Opportunity costs (costs of overhead and money) | |||||||
Miscellaneous (taxes, flexibility of the supplier, support costs) | ++ | + | |||||
Costs of qualifying and selecting suppliers | +++ | ++ |
Company 1 | Company 2 | Company 3 | Company 4 | Company 5 | Company 6 | Company 7 | |
---|---|---|---|---|---|---|---|
Market risk | +++ | ++ | ++ | ||||
Performance risk | ++ | ++ | ++ | ++ | ++ | ++ | |
Complexity risk | |||||||
Availability of alternative suppliers in case of capacity bottlenecks | ++ | ++ | + | + | + | + | |
Availability of alternative suppliers in case of supply problems | +++ | +++ | + | + | + | ||
Availability of alternative suppliers in case a supplier is eliminated |
Confirmative Findings | Critical Reflections | |
---|---|---|
TCO |
|
|
Supplier segmentation |
|
|
Supply chain change management |
|
|
© 2020 by the author. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/).
Share and Cite
Hoek, R.v. Responding to COVID-19 Supply Chain Risks—Insights from Supply Chain Change Management, Total Cost of Ownership and Supplier Segmentation Theory. Logistics 2020, 4, 23. https://doi.org/10.3390/logistics4040023
Hoek Rv. Responding to COVID-19 Supply Chain Risks—Insights from Supply Chain Change Management, Total Cost of Ownership and Supplier Segmentation Theory. Logistics. 2020; 4(4):23. https://doi.org/10.3390/logistics4040023
Chicago/Turabian StyleHoek, Remko van. 2020. "Responding to COVID-19 Supply Chain Risks—Insights from Supply Chain Change Management, Total Cost of Ownership and Supplier Segmentation Theory" Logistics 4, no. 4: 23. https://doi.org/10.3390/logistics4040023