Learning from Crisis – Building a Robust Supply Chain
During the Covid crisis, many companies have experienced supply chain issues. This current recovery period is an opportunity assess the lessons learned. Here are four “do it yourself” assessments that will help you build a robust supply chain that gives you competitive advantage.
From the perspectives of cost and risk, the responsibility for resolving these issues sits squarely on the desk of the Chief Financial Officer. Completing the following 4 assessments in partnership with your supply chain team will prepare your company to resolve any issues while improving the effectiveness of your supply chain.
Identify Critical Supply Chain:
Many companies procure large numbers of products and services, but not all of these have the same criticality. It is important to assess and document your Critical Supply Chain. Critical Supply Chain consists of components or services needed to build, and ship products. Most of the us think of the bill of materials when we imagine our Critical Supply Chain, but other services such as logistics and consumable products like gloves, etc. are also part of the Critical Supply Chain. During this crisis – Personal Protection Equipment (PPE) has become a Critical Supply Chain component. The rest of the supply chain is important but offers more leeway.
Take stock. What does your Critical Supply Chain look like?
Availability and Flexibility Assessment:
Once the Critical Supply Chain is identified, the next step is to assess its availability and flexibility. The first consideration is to understand which of these components or services are custom made – unique for the company, and which are commodity items.
Custom products normally have longer lead times and are likely to be single sourced. It is good to have contractual agreements for upside volume in case of spike in demand (as seen by some food manufacturers), and downside flexibility to minimize financial exposure in case of sudden downturn. Many businesses are shifting from their overseas suppliers, where the lead times including transportation have been more than three months, to regional suppliers with shorter lead times.
Even in commodity products, many companies have no backup suppliers identified. This crisis has resulted in longer than normal lead times and lack of availability of certain items. It is important for all the critical commodity items to have alternate suppliers not only identified but validated. Validation may require small changes internally (machine setting etc.) to accommodate alternate supplier products as well as ensuring that quality is acceptable.
Take stock. Does your Critical Supply Chain ensure availability and flexibility?
Supplier Risk Assessment:
Periodic reviews of the suppliers delivering critical components is a key component of supply chain risk management. Supplier quality procedures and remediation processes are important to ensure you get quality products every time. When exceptions occur you need to know your suppler can take fast, corrective action. Supplier risk assessments includes understanding their ability to do rush orders, move production between different facilities, and their potential bottlenecks and remediation plans. These supplier assessments need not be complex. Most major suppliers already have these plans in place; you just need to understand and assess them.
Take stock. Do your suppliers meet your performance needs and risk management criteria?
With supply chain costs making up one of the biggest operating expenses at many companies, clear focus in this area is essential to maintain the competitiveness of your products. Prices of commodities and other supply chain inputs - such as freight, paper and tech products - often fluctuate. Other components and services are more stable but even there the competitive landscape can shift between the major players. It is important that companies periodically assess market and supplier costs. Additionally, companies should evaluate their custom components and services to see if they are providing value – as invariably there are both hard and soft costs of these customizations.
Take stock. Do you understand where price shocks are most likely to impact your cost structure and what you are doing to mitigate them?
This crisis has shone light on many supply chain shortcomings. As you move to the recovery phase, these assessments will strengthen your company’s competitive edge.
To supplement the work described above CFO.University has developed a short Supply Chain Risk Assessment Tool that will also assist you in improving your supply chain.
If you would like to add some external leadership to improving your supply chain Dileep and his ERA team are here to help you. He is committed to making regional middle market companies more competitive. Please do not hesitate to reach out to Dileep.
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