Deloitte Sourcing & Procurement Response To COVID-19

Deloitte Sourcing & Procurement Responseto COVID-19June 2020

A holistic view of sourcing and procurement risks and COVID-19 in contextWider macro risks will impact the entire business world and the extended supply chain managing procurement risks and costs are priorities now and need to be mitigated and managedPROCUREMENT SITUATION POST-COVIDEconomic downturn and deflation emerged as the biggest risk in 202032% estimated decrease in global trade volume compared to 2019Great drop in Index of Consumer Sentiment from Mar’20 onwardsMost CPOs feel procurement-related risks have increased over the last 12 monthsIncreased complexity through uncertainty of demandPost-pandemic demand imbalances lead to inventory challengesUncertainty of delivery reliability of top tier suppliers, short-term and long-termMore supply chain transparency by consumers concerned about product qualityDisrupted supply chains and needed risk managementEven before COVID, CPOs rated risk reduction as top priority in 2020Heavy reliance on suppliers from China and emerging poses supply riskNon-transparent supply chain and supplier landscape limited procurementfunctions’ ability to assess COVID impactChallenged procurement and sourcing functionsPandemic and supply failure uncovered strategic importance of sourcing andprocurement functions and their influence on risk managementPost-COVID collaborating with IT, Finance and operations is vital in developing aprocurement function of the futureOBJECTIVESAdjust to economic realities andprioritize flexibility to succeed inan uncertain environmentImprove supply risk managementcapabilitiesCoordinate investments andactivities to reduce supply chaincomplexity and dependencies 2020 Deloitte Consulting AG. All rights reserved.2

How client patterns change and what are likely impacts in your supply chainSix potential challenges with potential of further know-on effects impacting your ability to servea changing market5ERP and othersystems6Supplier 114Supplier 22Retail &WholesalerCustomerse3Warehouse anddistributionManufacturerSupplier 3123456Demand forecastshave shiftedsignificantlyDemand shiftingto on-linechannels at scaleSome supplierswill fail to meetdemandInventory choiceswill be critical tobusiness survivalCashflows isessential for allGovernments arehelpingWhat are theforward demandscenarios thatrequire a responseand createopportunity?How do we go aboutimplementing online channel toservice customers inthe market?Which suppliers areat risk and what arealternativelysources of supplynow and into thefuture?What inventory isessential and whatcan be rationalisedto save workingcapital andoperating costs?How we balanceflexibility and speedwith financialcontrol in theprocure to payprocess?How to takeadvantage of therelief beingoffered byGovernment? 2020 Deloitte Consulting AG. All rights reserved.3

Our Respond, Recover, Thrive frameworkEach step of the framework addresses one or more paradoxes and complexity emerging from arange of choices to address themOperating Model ParadoxSurvival Paradox“How do I ensure supplyfrom my existing suppliersor new suppliers, and arethey reliable? Will mystrategic suppliers stayin business after theshock?”Supply Market & ClientDemand Paradox“Will my client demandchange and where is ourbusiness heading?How is my supply basedealing with theconsequences, do I needanother supply base?“RespondRecoverDeal with the present situation andmanage continuityHere and now“Do the changes require a newconfiguration of my organisation?Should I consider a newoperating model with manyunknowns or, continue withexisting models that areproven?”Learn andemerge strongerNear-term planningResilience Paradox“How do I build a resilientsupply base that mayimpact near termcompetitiveness oraddress risk from futuredisruptions as theyemerge?”ThrivePrepare for the “new normal”Medium-term outlookLong-term strategy 2020 Deloitte Consulting AG. All rights reserved.4

Initial stage of the crisisRespond Deal with present situation & manage continuityActionsSupply issecure Cash isking Gain visibility of supply risks and shortagesAssess substitute suppliers and materialsSafeguard transportRe-evaluate stocks levels - recreate FY 21 budget andbaselinesExtend payables to the extent possible to conserve cashOptimize fixed costs - aligned to “lights on” strategyDevelop cross-business treasury plan for cash managementValue PropositionsKey Capabilities Initial Risk Exposure Assessment Supplier Visibility, Risk Sensingand Mitigation Commodity risk management Transportation Sourcing Supply and capacity risks assessment Commodity price risk / volatilitymanagement – commodity segmentation Transportation mode and capacityevaluation Inventory mapping - cost evolution andshelf-life Storage Crisis Center I2P process improvement and complianceenhancement Contract and payment terms negotiations Accounts Payables Management 360 Working Capital monitor Stress tests Spend analysis - core vs non-core spendand control maverick buying Safety Stock adjustments (planning) 2020 Deloitte Consulting AG. All rights reserved.5

Likely current stage for most of our clientsRecover Learn & emerge strongerActionsVisibility isPreciousSupply isdiversified Reassess commodity risk/volatility trends and quantify exposure Assess supplier financial health - strengthen collaboration orleverage cost reduction opportunities if possibleQualify additional sources of supplies - collaborate on fasttracking new material testing and approval Stock isrebalancedCustomerdemand ischangingEnhance visibility of supply network to identify risks andcapacity constrainsRe-balance stocks levels – create revamp scenarios togetherwith operations Reassess category strategy in alignment with supply chainplanning Closeness to the customer to understand how their needs havechanged Collaborate with suppliers in developing new solutions thatmeet customer needs – Join forces and leverage suppliers’ corecompetences to jointly bring innovative productsValue PropositionsKey Capabilities Supplier Risk Management (Tier 1 and 2) Commodity risk management Supplier Risk Management (Tier 1) Supplier Stabilization support Cost reduction assessment Supplier Qualification Cross-Supply Chain understanding andcollaboration Scenario based storage planning Category strategy management Customer survey - data analytics Ideation with suppliers – lean start upPOC approach Multi-tier Visibility, Risk Sensingand Mitigation Commodity Risk Management Supplier Tiger Teams – suppliercollaboration Cost transformation program Sourcing strategy reassessment- Diversify - Multiple sourcing- Supplier Qualification Supplier & Trade ComplianceManagement Inventory analysis and controlmethods (planning) Category strategy management Customer survey – data analytics Supplier collaboration – StrategicAlliances Sourcing led innovation 2020 Deloitte Consulting AG. All rights reserved.6

Build the foundation for the futureThrive Long-term strategy and capability buildingActionsValuechain isilluminatedSourcing isresilientControltower for a“singleview”Customercentricityis coreValue PropositionsKey Capabilities Illuminate the extended supplier network to picture supplydependencies and identify bottlenecks Advance analytics such as deep webcrawlers and AI CentralSight - Supply NetworkIllumination – n tier supplier Monitor status up until the bottleneck is removed Monitor spend Cognitive Spend Proactively buffer risky supply nodes (secondary & tertiaryoptions) with the most optimized model Restructure the sourcing supply network to build in resilience –take a long term view E2E Sourcing strategyRedefine the Procurement operating model given the newnormal – will involve ecosystem changes Procurement operating model design Scenario stress tests modeling Prepare business continuity plans for a wider range of scenarios Supply base restructure assessment Supplier Qualification - Define & implement E2E visibility for your supply chain Control tower Implement a Sense & Respond capability to identify, predict &prescribe responses to supply or demand disruptionsFuture-oriented technology assessmentand implementation Use the opportunity to deploy I4.0 solutions to improve longterm competitiveness Establish open communication channels with customers –leverage technology Technology selection and implementationDefine process to improve customer information sharing andtransform the information into an actionable plan drivingsourcing decisions back-up the supply chain Customer data translation Development with suppliers – scale up Supplier collaboration –Strategic Alliances Sourcing led innovationE2E Sourcing strategyService Delivery ModelCategory playbooksSupply base local vs globalDiversify - Multiple sourcingSupplier Qualification 2020 Deloitte Consulting AG. All rights reserved.7

Scenario considerationsWe help to address “the unknown” by articulating scenarios and work with you what it means toyour supply chain and procurement teamsBest case scenarioMid-worse case scenario Health care systems are successful incombating virus spread andpandemic if over within 2-3 months Mid term disruptions on both supplyand demand side Government stimulus in place tomitigate crisis Economic V-shape scenario Virus remains chronic and returns inautumn Long term crisis on both supply anddemand side Government stimulus in place but notsufficient to “kick start” the economy Economic U-shape scenarioWorst case scenario Most of population infected and/ or18 months before situationstabilization Disruptive changes to businesslandscape Governments unable to combateconomic depression Economic L-shape scenarioStrategy simulations& “war games” 2020 Deloitte Consulting AG. All rights reserved.8

Tailored offerings for every scenarioDeloitte supports businesses to recover quickly from the current situation and to develop robustand future-ready sourcing strategies and procurement functionsBUILDING A FUTURE-READY SOURCING & PROCUREMENT FUNCTIONSTRATEGY SIMULATION& WARGAMESCOST & CASHOPTIMIZATIONDIGITAL SUPPLYOPTIMIZATIONSUPPLY RISKMANAGEMENTTARGET OPERATINGMODEL“Supports in navigatinguncertainties”“Delivers short- andlong term cost savings”“Builds a future-proofprocurement capability”“Mitigates supply risksand creates transparency”“Optimises ways ofworking” Scenario-basedsourcing strategyenable flexibility Robust progressivescenario up to breakingpoint Quantitative modelingto complementqualitative angle Reducing third partyspend across indirectand direct materialcategories throughstrategic sourcing,contract rationalizationOptimize workingcapital to improveoperations andfinancials Define a bold digitalvision, but executeiteratively on a strongfoundation Measuring and improvingtotal landed cost as wellas social andenvironmental impact Align procurement’sdigital strategy withthat of the organization Product LifecycleManagement Create sourcing insightsand source to payprocess efficiency Enhancing the ability ofan organization to drivevalue through improvedcapabilities andoperating models Revise operating modelbased on COVID impactin the industry 2020 Deloitte Consulting AG. All rights reserved.9