2022 saw procurement and supply chain specialists starting to grapple with the triple impacts of price inflation, rising interest rates, and geopolitical turmoil. Now, as we move further into 2023, the effects are becoming more pronounced. Supply chains are still struggling, interest rates are continuing to rise, and individuals and businesses alike are feeling the effects of rapidly increasing prices.
For many professionals, this will be the first time they have had to deal with rising interest rates, as central banks have generally kept rates close to zero since the financial crisis in 2008. This means that for those who have entered the workforce in the past 10 to 15 years with a belief that they can borrow money cheaply to invest in driving up revenues – even marginally profitable revenues – there is a rude awakening coming.
So, with price volatility, rising interest rates, growing instability in global supply chains, and an inevitable decline in consumer spending, procurement and supply chain professionals are now having to confront the question of how to build more resilient supply chains while continuing to keep costs down and ensuring continued profitability. The answers lie in taking a more product-centric view of the world and building differentiated supply chains that serve different categories of products in different ways. This means, for example, that the supply chain for low margin products will be lean and cost-focused while those for core, high-margin products will be more resilient by design, even if this means accepting higher costs and the need to deploy greater amounts of working capital.
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What makes a business profitable in rough seas?
For businesses to remain profitable in times of crisis, they first need to identify what makes them profitable. While that may sound straightforward, it requires a deep understanding of how their products behave in the market and the true cost of those products. This is a level of insight that is often not easily available to managers making day-to-day decisions.
Understanding what really drives profitability requires undertaking complex cost-to-serve or similar type analysis. This can be a time-consuming process but will provide invaluable information on how each product contributes to the company’s bottom line, allowing for more informed choices to be made. Businesses need to consider not only the material costs of each product, but everything else that might add cost, including labor, distribution, transportation, servicing, support services, and any other overheads.
Once they have this information, procurement and supply chain teams should collaborate with sales and marketing to drive down the costs of the various cost elements of key product lines and make informed decisions about the benefits of keeping marginally profitable products in the portfolio.
Taking a more granular, product-led approach is important in periods of uncertainty where there are multiple demands on procurement and supply chain teams that need to make smart decisions about where they spend their time.
A balanced approach to inventory
The story of supply chain management over the past 20 to 30 years has been very much one of striving to “lean” out operations and reduce inventory. The objective of this approach is to release cash back into the business by reducing working capital requirements and reduce the overall cost of managing the supply chain.
The world, however, is dangerously unpredictable, and carrying too little stock is a high-risk strategy in a world of global pandemics and interstate warfare. If supply chains are disrupted and the demand for materials suddenly surges, businesses won't be able to replenish their stock quickly enough to meet production requirements.
There are, of course, disadvantages associated with having too much inventory. Companies that keep large inventories, following the “just in case” strategy, face higher storage costs and the risk of stock becoming damaged or obsolete.
Therefore, a balance is needed. As economic uncertainties continue, companies need to keep costs low but still have enough flexibility to adapt to any sudden external changes. Assessing their product portfolios and adjusting stock levels accordingly can help to keep supply lean, but with enough of a buffer to absorb any disruption to in-demand and highly profitable product lines.
More diversity, more options
As well as incorporating a more balanced approach to stock and inventory, supply chains can be further strengthened by adding more diversity to the roster of suppliers. Economic challenges – as well as geopolitical disruption – can lead to travel restrictions, factory closures, and cut-off supply routes, which will cause shortages and delays in the availability of goods and services.
To ensure resilience in the supply chain, it is important to have a firm understanding of suppliers and their financial position. This means looking at current financial stability, continuity plans, and risk management strategies, and determining who will be most affected by factors such as rising interest rates. Additionally, clear communication channels should be established to monitor performance and address any issues.
Once the suppliers most at risk have been identified, businesses need to put alternative options in place, particularly for those supply chains that are critical to their infrastructure. By identifying back-up suppliers and removing the reliance on a single source, companies can further prepare for and mitigate the impact of any potential disruptions, helping to ensure the continuity of their operations.
Batten down the hatches
While facing economic downturn, the world is also going through a period of tremendous change. The global market is shifting under new sanctions, shortages, and an increased focus on the environmental consequences of international trade, leading us towards a less global, more local business model.
As companies begin to assess their product portfolios and supply chains to protect them against the current financial landscape, it is also worth trying to futureproof any actions. Organizations should start to determine if any manufacturing, or other operations, can be brought closer to home, using in-depth data analytics to predict future trends and whether these changes would be financially viable.
While making significant changes to any manufacturing operations or processes is risky, companies that aren’t willing to make changes and adapt to the developing market conditions may find themselves falling behind their competitors.
A differentiated supply chain might be the panacea for businesses looking to remain profitable and competitive, but achieving it is not easy. Understanding the product portfolio and the drivers of product profitability is not always straightforward. And building differentiated supply chains that are designed for cost or resilience is time-consuming.
Procurement can help support the transition by breaking down the intricacies of the supply chain, analyzing the details, and making informed decisions that will govern the future of the business. Through collaboration with stakeholders, procurement can help build consensus and facilitate the change needed.
While a differentiated supply chain may require a significant investment of time and resources, it can prove a powerful tool for businesses looking to remain profitable and competitive – now, and as we move forward into an uncertain future.
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