Outbreaks of Covid-19 threw global supply chains into turmoil, with businesses’ resilience being pushed to their limits. Throughout the pandemic, companies have had to keep their heads above water financially whilst also juggling operations and supplier challenges. It was a tough task for procurement teams, but many were able to showcase the true value of their work.
In this article I will be looking at the role of procurement and how this has changed over the past 18 months. In September, I attended the hybrid event called “Procurement and Supply Chain Live”, where I had the opportunity to listen to industry experts. I found a talk from James Westgarth, Senior Director, Procurement Performance, Systems & Excellence at the Lufthansa Group particularly insightful and I will be linking back to his speech.
Pre-pandemic procurement
Procurement is all about getting the right things in the right quantity at the right time, which is hard to achieve at the best of times, especially when various goods, locations and suppliers are involved. Traditionally, procurement functions were viewed as administrative, such as overseeing the operational elements of the business. In today’s world, procurement functions must be more strategic and focus on the wider business and commercial environment.
Procurement when the pandemic hit
The Coronavirus pandemic was undoubtedly a shock to many systems across the world. Businesses were forced to implement quick-thinking and steer their operations in a different direction to match changing demands.
The Lufthansa Group had to shift their focus from commercial passenger flights to cargo flights, fulfilling the need for the transportation of medical equipment. Their most profitable flight routes had to be fully shut down and by April 2020, cash was “bleeding out” of their accounts. The most important aim for the procurement team was to stop this cash bleed whilst maintaining supply chain resilience, meaning they had to go back to the drawing board to determine how they could help prevent insolvency whilst also maintaining their reputation.
What survival methods did procurement teams use?
It was essential that businesses implemented short-term solutions to prevent further financial damage. Procurement teams in companies across the world were being called upon to advise leaders on what the business’ next steps should be.
Here are some methods that were introduced by the Lufthansa Group procurement teams:
- Extending payment runs
Before the pandemic struck, the group conducted daily payment runs to suppliers. When they began to feel the financial pressure, they made the decision to have payment runs on a weekly basis, meaning payments would still be made, but the group had more time to make these payments. With the extra time, teams analyzed the figures in detail, created in-depth reports and decided which payments could be extended further.
- Establishing a ‘cash office’
The board of the Lufthansa Group set up a cash office in an attempt to manage the crisis from a financial perspective, looking at the liquidity and forecasts across the group. The team were responsible for controlling the cash coming out of the business, as well as leveraging offsetting. Procurement teams had an enhanced role, as they were involved in decisions in extending payment terms and they were there to ultimately deliver value across the board.
- Using a zero-based approach
This innovative approach meant that procurement teams were stripping things back and re-analyzing past decisions. This process allowed the group to reduce costs whilst maintaining quality. For example, they located cheaper crew hotels for airline staff which still met the quality standards. Looking at various areas of the business and removing unnecessary costs allows for big savings.
- The use of a negotiation accelerator
The group introduced this taskforce as an extra step towards making savings through negotiation. Although some prices are out of the group’s control, such as the price of fuel, negotiations can be made with suppliers to agree fair prices.
Were these methods successful?
Procurement teams across the world would have implemented different strategies. Some would have worked, and others unfortunately wouldn’t have. The Lufthansa Group’s widespread procurement efforts were well-received, and the team gained an award from the Chartered Institute of Procurement and Supply (CIPS) for their resilience throughout the crisis. As well as making EBIT savings of 151 million Euro in crisis-relevant initiatives, the group retained its reputation as well as its long-term supplier relationships. They managed to avoid insolvency, and they will continue to utilize these methods in the future, with industrializing the zero-based approach being an example of this.
How procurement’s role has changed
As a result of the pandemic, procurement teams may have a heightened role within a business, with James Westgarth saying that the Lufthansa Group board now “know who we are”, and they have received board-level sponsorship for the future. The crisis forced companies to reshuffle and develop new competencies, such as being more data driven, which they will take into post-pandemic operations. Businesses will now see the importance of planning, and many will be better equipped if another crisis was to occur.
In the CPO Strategy magazine, Lufthansa Group Chief Procurement Officer, Angela Qu said that “The value of procurement has been particularly effective in knowing when to aggressively conserve cash to meet internal liquidity goals, and when to protect and support the most fragile parts of the supply chain in these turbulent times.”
Closing thoughts
It seems tricky to pinpoint positive aspects of the pandemic at times, but procurement teams were able to shine unlike ever before. Although it has not been an easy ride for many, procurement teams can continue to apply the cost-saving skills they have learnt in an attempt to compensate for the financial difficulties they gained. This process shows the importance of remaining optimistic and to “never let a good crisis go to waste.”
