CFO Talk - Learning from Crisis. Building a Robust Supply Chain
Dileep Kulkarni, a supply chain expert with a finance background joined us for the second time on CFO Talk. A few months ago Dileep shared his thoughts on How the Manage Your Supply Chain During a Crisis In this Talk he shares his perspective on how finance leaders can help Build a Robust Supply Chain as we exit a crisis. He defines the “critical supply chain”, what you should expect of your suppliers and how to evaluate supplier risk.
In the video Dileep and Steve make reference to some resources you can learn more about here:
- Four assessments to evaluate the effectiveness of your supply chain Assessing Your Supply Chain
- Here is a link to our supply chain risk assessment tool: Supply Chain Risk Assessment Tool
- Contact Dileep for a deeper discussion on how you can improve your supply chain: Dileep Kulkarni
- For more insight on post crisis planning: CFO - Post Crisis Planning
Listen to the audio version here.
Welcome to CFO Talk. I am your host Steve Rosvold, Chief Learning Officer at CFO.University. Joining me again today is Dileep Kulkarni, a Director at Expense Reduction Analysts, where he helps CFO’s and business leaders improve their supply chain. Dileep is a Business Tech graduate from the Indian Institute of Technology with an MBA from the University of Michigan. Dileep spent 25 years with Intel Corporation in various commercial and financial roles, including Strategic Deal Director of the global supply chain. Today, we are going to talk about learning from crisis and building a robust supply chain. Welcome Dileep. It is great to have you on the show again.
Thank you Steve.
Our topic today, Learning from Crisis – Building a Robust Supply Chain, addresses a challenge many businesses are facing. A couple months ago, we talked about what to do with the supply chain when entering a crisis. Today, we’re going to talk about what to do with the supply chain when you are emerging from a crisis. Your background is so strong and you have a really good way of articulating to our CFOs, as well as our other business leaders, how to manage a supply chain. Thank you again for being here. My first question is, What is the difference between managing the supply chain when you are entering a crisis versus when you’re coming out of a crisis?
The last crisis we entered was after eight to ten years of stable flow. Most of us were not prepared for the crisis when it happened. We found some people with great businesses and even essential businesses had difficulty with supply availability. Some people who would have chose to temporarily shut down their Businesses couldn’t because they had trouble shutting off their supply spigot. We have seen flexibility and availability issues on both sides of the spectrum. Now that we have gone through it for the last three months and come to a new normal, it’s time to really take a look at what learnings we had from these times. We can use that to build a new and much more robust system. Not only getting ourselves ready for a new normal, but also being much more prepared in advance if COVID resurges or a new crisis presents itself.
The last time we talked you highlighted three things: risk management, margin management and inventory. So, the balance sheet, the p&l and kind of general risk management. In an article you recently wrote for us, you talked about the critical supply chain. Can you remind us what that is about and how we can focus on the critical parts of our supply chain?
Critical supply chain, particularly for manufacturing, is all the components and services that you need to build and ship your products. When you think of critical supply chain, equate it to the bill of materials. There are some additional components or services, like freight or safety supplies. For example, PPE, personal protection equipment, is now particularly critical to nearly all supply chains. When you look through that whole process, you will learn a lot. You will identify your critical suppliers. You will also identify which parts are custom parts and which parts are commodity. When you look at the critical supply chain with a new eyes, you will find things that will help you build a better supply chain.
Interesting. It really helps to understand how analyze customers and products and split supply chain components into commodity and custom buckets. I think those are quadrants you can look at to come up with these critical pieces. I really like the way that flows. You also mentioned that availability and flexibility are becoming so important. We are seeing that in the finance field in general, when it comes to planning, being agile is really important. How is that impacting the supply chain?
That is a very good question because the first thing that hit most people were the flexibility and availability. This closely relates to the custom versus commodity discussion above. When you are in a custom situation, because of the investment needed on the supplier side and your side, you are likely tied to a single source. Which means the only way you’re going to get that part now is from one supplier. So It’s very important to understand what the availability is in those circumstances.
Beyond the custom parts most of us have relied on the same suppliers in the commodity market. We haven’t even thought through an alternate supplier base for those types of commodity components or services. It is important during this time, at least from an availability and flexibility perspective, to have alternate suppliers evaluated and even validated because if a supplier has a slight tweak you may need to make some changes in your manufacturing process to accommodate your ultimate supply. Once you have the critical supply chain and suppliers identified it is important to spend time analyzing the flexibility of each supplier, whether it’s an alternate supplier or a current supplier. And in fact, codify the flexibility and availability as much as possible within your written supplier contracts because you’re banking on them, whether you’re going to turn off or increase your offtake.
So really try to get more flexible terms in your contracts and find vendors who can give you that flexibility. You also made a point of credit. During the first few months of this pandemic, with everyone shutting down, there has been some real financial hardship. How intense should people be in making sure their suppliers are credit worthy? What should they be doing to ensure that their suppliers are going to still be there?
That is a very good point. Many of the suppliers have gone through the shock themselves. You should definitely look at the financial stability of a supplier. Beyond financial stability, you should look at:
- What kind of contingency plans do they have?
- How are they recovering from this COVID crisis?
- Are they able to get their production fully back online?
- Do they have all their employees back online?
- What would their production systems have been doing?
In addition to the availability, having production back online and financial pieces being stable, you should look at their quality processes. Many times, there is a turnover in employees. Whenever that happens, quality can take a hit unless there is a good quality system in place. It’s important to assess their quality process as well as the process by which they go through corrective measures. You should assess your critical suppliers from financial, operational and quality perspectives to make sure they are geared for your production.
I remember you mentioned in our last Talk, making sure your suppliers quality systems are good. Being able to audit those critical supply chain issues. Do you think there is going to be a tendency for suppliers to try to recover costs by reducing their investment in labor and quality? Can they use different quality products in their process? Try to quicken things up to increase throughput? Do you think that might be something people are going to try to do to kind of edge back, make some profits over the next couple of years and make up for their Covid-19 losses?
Everybody wants to get back to their normal production and make the best of it. Everybody is trying to figure out their own supply chain, how that is getting impacted and how they should react. It’s very important at this time, particularly with your physical supplier, to have a much better communication process. It is important for them to know what your requirements are. In fact, I am encouraging my clients to have a monthly meeting where they not only give their suppliers immediate purchase orders but also a visibility that’s longer term to the best of their knowledge. If your supplier knows that there is a visibility over the next eight to ten months, they appreciate your effort but will be understanding as things change. Not providing them visibility makes you a riskier customer for them. Also, understand what their supply chain is going through. Are their lead time stretching? Are they changing their internal processes? These are the kinds of things you need to be on top all the time. A data sharing meeting with your supplier, even if that means a 30 minute, 40 minute meeting every month, is super important.
That is a great idea. Communication is crucial not only with your critical suppliers, but also with your employees, your customers and all of your stakeholders because there’s so much change happening you can’t keep up with it. Having a really diligent process that forces you to do that rather than having it happen when there’s a problem can prevent a lot of problems.
One of the suppliers that we have been working with uses plastic bottles and suddenly the lead time for plastic bottles has stretched enormously because plastic bottles are used for sanitation equipment like hand sanitizers. Suddenly, lead times and the demand have gone through the roof. Most of the suppliers are unable to meet those needs. So, having that visibility allows you to adjust your schedule, adjust your inventory and have your supplier build some extra inventory that they can hold for a little while. Going through all these things will ensure a continuity of supply.
Being able to recognize that before you put an order in, rather than after, is important.. One of the things we have not talked about yet is price. Do you expect prices to increase with all these supply disruptions and repurposing of materials, like plastic bottles? What should we expect? And how should we negotiate price changes in the future?
Cost and pricing would depend on the supply and demand of these commodities. In some cases, there is a very high demand and a likelihood of price increases for those supplies. We have seen that in glass. We used to get a lot of glass from China. Now that the tariffs and anti-dumping duties are in place, U.S. suppliers have increased the price of the glass. It all depends on the supply and demand of commodities. There are some other places where the demand has somewhat softened and the stronger suppliers are trying to use that to gain market share. There is actually a much better opportunity to get better pricing or cost structure at this time, because of the softening in demand. It all depends on which commodity and which area we are talking about.
That relates a lot to risk management. Finance people can help by having the eye into supply and demand for their consumables, their raw materials and their critical supply chain items. That is an area that the FP&A groups can really help. The procurement and understanding how the supply and demand dynamics of some of their critical products could cause their prices to increase. How does that affect our whole margin structure? What do we have to do? There is a real role for finance to play in helping the procurement and the margin management personnel. If we can get that type of insight into the demand of our key raw materials we’ll be able to predict future prices that will help us make good decisions today.
I think there is one more aspect that the FP&A people can help as well. You talked about looking outside helping with the supplier assessments and helping with the market itself. But there is some internal look as well they can do at this time. Custom products have both hard costs and soft costs. We talked about some of the soft costs like availability, lead times that require holding more inventory. There is also another soft cost, it’s very difficult to move, it takes a long time to move, between the suppliers. You need to assess whether customization, that differentiation, is really adding value to your products and to your margins of the product. So it is important not only at this time to look at outside, but also inside and see if there is a way to make our own requirements easy so that you can get a better price structure from your suppliers.
We can use technology as another example of where customization can be very costly. When we try to over-customize technology, it is almost always a failure. So being able to buy off the shelf and avoid customization results in quicker installations and less implementation issues. If the customization does not link directly to increasing brand value it likely shouldn’t be done. It is a great point that people must be aware of the value of that customer service. It is going to cost you a lot. When you will notice it is in a crisis when all of a sudden a supply is unavailable and you cannot get a replacement product and all of a sudden you can’t get something and you are completely stuck because of the customization. Any other recommendations you would like to share with finance chiefs regarding the supply chain in post crisis?
At this time we have gone through the crisis and things are now starting to stabilize. There is probably going to be profit pressure going forward. Finance people need to really think of the supply chain as merely an extension of their own operation. If you have that broad view, you will look at the costs that are both in-house as well as those you are imposing on your suppliers and your service people. If you look at it holistically - hard and soft cost, availability, risk management, inventory, and pricing - all will come to the forefront soon. Look both internally and externally to build a robust supply chain system.
Wow, that’s great advice. There are so many aspects to the critical supply chain; custom versus commodity, safety and the credit issue of your suppliers. There is also an operational aspect and a quality aspect. You spoke about improving communication. How important that is and just so many ideas on how to create a robust supply chain. I can’t thank you enough for again coming the our show and sharing your wisdom on CFO Talk.
Thank you so much, Steve. It is always a pleasure.
I want to thank everyone for joining us for the CFO Talk. Dileep’s contact points will be readily available on this video. CFO.University is a community of members, scholars, companies and trusted advisors committed to professional development of chief financial officers. Learn more about CFO.University at www.CFO.University. Please reach out if we can help you with supply chain or other issues.
Enjoy yourself while you learn and stay engaged.
Most of all, be safe.
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