Impact of Covid-19 on Strategic Supplier Relationships

More than 75% of the companies have had moderate to severe impact to their relationship with suppliers and the suppliers ability to deliver on their contractual obligations due to Covid-19. More and more organizations are finding it difficult to review the various contractual clauses getting impacted by the pandemic and understand various options available to them. The main clauses in a typical contract to take into consideration during such times are Force Majeur, Termination options, Performance (SLA/KPI) requirements and non-performance protection clauses, Payment terms, Rate Changes, Spend thresholds or minimum revenue requirements and supplier exclusivity.  This has been true for both Buy-side as well as the Sell – side.

The other important thing that organization are realizing is the importance of having a comprehensive Supplier Risk management program. Most of the organizations have been conducting due diligence and re certifications on a periodic basis, usually coinciding with regulatory / compliance requirements. However, they are realizing that risk management program is truly effective when you have ongoing monitoring and risk mitigation process. In large organizations, where there are multiple 100’s of suppliers, its not possible to have same level of governance including risk management for all the suppliers. In these cases it is important to segment your suppliers based on the criticality of the supplier to the organization, amount of Spend, impact to organization in case of delivery failure and criticality of the data shared with Supplier (PII, SPI etc). Once supplier segmentation is done, the Governance and Risk Management process can be applied in a comprehensive manner to the top tier suppliers.

Following are the areas that become very critical during such crisis:

  • Open and transparent communication with suppliers
  • In-depth knowledge of contracts and its various clauses
  • Clear Business continuity plan that has been agreed and tested.
  • A comprehensive Risk assessment program covering financial and information security apart from other areas like regulatory, reputation, geographic etc, with built in contingency plans.
  • End to end visibility into supplier’s performance, risks and issues across all towers, divisions and contracts.

While all the above are important, make sure not to leave your Supplier EQ behind when taking decisions. The suppliers are also going through a difficult time as they are on the same boat. Even with their best of intentions, your supplier may not be able to provide the expected performance levels. It is very important to have an open and candid communication and understand their challenges. For example; If you can, make payments early or at least on time.  During this crisis, where there may be shortage of supply, suppliers will prioritize continuity to collaborative customers. As we all know with close collaboration, you can create new supplier value which is beyond anything that is written in your contracts.

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