Proactive supplier communication is critical in this pandemic

As the coronavirus epidemic shuts down the global economy, supply chain executives should be taking steps now to ensure that their supply base remains intact in the face of massive disruption.  This was certainly the case in the 2008 Great Recession.  We recently published a paper that demonstrates empirically that over the period of the major financial crisis, supply managers who regularly assess and develop an understanding of their key suppliers’ working capital conditions are more likely to re-negotiate contracts that revise payment terms, leading to improved supplier working capital and fewer supply chain disruptions.  The data was collected smack dab in the middle of the crisis, so we were able to capture what was happening in supply managers’ minds during this period.  Right now, shipments have stopped, payments have stopped, and people are being laid off.  Taking steps now to avoid future pain when the supply chain starts up is critical to ensure that suppliers survive this massive disruption, and are able to start back up again.

The notion of effective communication flows as a means for reduction of. future supplier disruption risk is aligned with Enactment Theory views that emphasize the benefits of risk reduction. Equivocality is reduced in buyers through information exchange and formal assessments in complex environments. Our research suggests that while such communication does not have a direct effect on supply disruption risk, it is mediated through proactive buyer actions to improve supplier financial health and contract re-negotiation mechanisms that may preempt financial distress.

Supplier managers who establish regular risk-based performance reviews with suppliers are more likely to adjust their payment terms to improve cash flow for suppliers facing problems.  Examples of communication involve meetings to identify the impact of economic conditions on supplier cash flow, regularly scheduled information sessions to exchange data on a supplier’s financial conditions, discussions on contingency planning and business continuity plans in advance of downward forecasts.  The research shows that although over half of the companies in our sample had regular communication with suppliers (60 per cent) and were discussing business continuity contingency planning (53 per cent), less than half were re-negotiating contracts (43 per cent). Also, over a third of firms had suppliers requesting improved payment terms, yet most buyers failed to act on these signals.  Don’t forget that financially healthy firms can leverage their resources effectively to drive actions to improve supplier financial heath during the economic recession.

Not acting on the warning signals will have dire consequences down the road when we emerge from this crisis.  These are important lessons learned that provide guidelines for supply chain executives in the current massive crisis.  We are in an economic downturn that has no parallels, and will be much worse than the 2008 financial crisis or the 2010 SARS epidemic.

If you don’t talk to your suppliers now, don’t be surprised when you call them this fall and there is no reply.  Supply chains are in this together, and now is not the time to act in an “every man for himself” mode..