Purchasing Chessboard in the time of crisis

The current crisis is not going away any time soon. And after a period of lockdowns and closed factories, procurement people around the world are adjusting to the new reality.

As a point of reference, COVID-19 is making life pretty difficult for procurement executives. Most of of your own factories are shut down or are preparing to reopen. With closed factories, you are not making anything and if you are not making anything, you are not buying anything. And even when you reopen the factories, you will be operating in a  much smaller market with less revenue.

And as your factories are preparing to reopen, you need to juggle supplier factories that are still in lockdown, closed borders, lack of trucking and air freight capacity and the threat of suppliers going bankrupt.

In this blog post and in a recent video, I discuss how the current crisis can be mitigated with the Purchasing Chessboard.

Your shrinking revenue in a shrinking market is not good news for your demand power. Even if your competitors are shrinking as fast as you do, it is safe to assume that on the x-axis of the Purchasing Chessboard, you will experience an overall shift to the left.

Your suppliers on the other hand are so preoccupied with keeping their people safe, securing their liquidity and overcoming logistical barriers, that production capacity will typically be reduced. Reduced production capacity translates into increased supply power, so on the y-axis, your suppliers will experience an overall shift upwards.

There may be exceptions to this rule of course. Your industry may still be stronger than an adjacent one, the supplier is also active in. In that case, your demand power may actually be increased.

As a rule of thumb, this crisis pushes you into the top left quadrant of the Purchasing Chessboard. And of course, this combination of low demand power and high supply power is where you normally don’t want to be. Anyway, it is what it is an let’s take a look at what the Purchasing Chessboard has to offer.

Broadly speaking, the methods in the upper left quadrant fall into two camps. The first one can be labeled Engineering. With the 12 methods in this camp, we are trying to modify specifications in order to commoditize the spend.

The simplest of these method is complexity reduction. Talk to your counterparts in product marketing, manufacturing and engineering to see which product configurations can be dropped in the time of crisis. No customer really needs 3 billion configurations of a car or 300 different types of yoghurt.

You can take it up a notch or two by going into design for manufacture, a method that Apple really excels in and that I have outlined in one of my recent videos on the iPhone SE.

Or you go to the extreme, to invention on demand. There is the old saying that war is the father of all things. An extreme health crisis like the one we are experiencing right know could also be the catalyst for great innovation.

So think about your ambition level. Do you just want to muddle through this crisis or to you want to emerge on top at the other end. If it is the latter, you may want to consider to out innovate your competitors and invention on demand is great for doing this in a novel way. I did a video on invention on demand a coupe of months ago.

The second camp can be labelled Entrepreneurship. With the four methods in this camp, we are trying to team with third parties in order to gain leverage.

Political framework management is super important in this crisis. A critical shipment form a supplier can’t get through the border - call your representative or the minister of commerce. A supplier factory is shut down because it is not deemed essential - call the mayor or the governor.

Vertical integration or M&A may also be very effective in this crisis. Is there a supplier with really interesting capabilities that would complement your company nicely - now may be the time to right out acquire this supplier.

In summary, the current crisis will shift a lot of the stuff you buy left and up in the Purchasing Chessboard. While the upper left quadrant is not where you want to be, there are still 16 methods to deploy.

Most of those will have you modify specifications in order to commoditize the spend.. Some will see you team with third parties in order to gain leverage. And maybe, these methods will not only help you to muddle through the crisis but to come out on top of competition on the other end.