Sustainable changes to your supply chain will help your company survive economic volatility
What is happening to the economy? Throughout the beginning of 2023, the words “recession,” “deflation,” “stagflation,” “inflation,” and “disinflation” were thrown around from week to week.
Now, in survey after survey, CEOs register their fear that a recession will occur in 2023—and at the same time, their conviction that the economy will pick up in late 2023 or early 2024. Their second biggest worry is inflation. At the same time, most stock market forecasts indicate improvement in mid-2023.
Companies who want to get ahead of inflation and recession need a sustainable approach, one that will strengthen them for future economic challenges, because volatility is longer lasting and more certain than any other economic forecast.
Supply and demand are out of balance. Covid shortages allowed producers to dictate prices. Now there is unsold product clogging warehouses and losing value as prices fall. Faced with low prices, excess inventory, and cautious customers, leaders may panic and make the wrong moves (or none at all) to secure EBITDA, profits, and growth. The usual methods of accomplishing those goals, including cutting costs and wages and squeezing suppliers, seldom work in the long term as the economic winds change direction. There are better and more sustainable strategies.
Using supplier optionality, network design and footprint optimization, and resource allocation—companies rebalance the supply chain with three high ROI strategies that prepare them for any future change.
Supplier optionality allows win-win negotiation
Companies face two threats: supplier contracts that tie them to higher prices and a loss of demand that blocks them from passing on costs to customers. Supplier optionality acts as a bulwark against those threats and prevents the total collapse of a supply chain.
With supplier optionality, companies build an optimized combination of in-shore, off-shore, and near-shore suppliers who are periodically rated on their ability to deliver quality product on time, in full. The procurement department builds strong strategic, rather than merely tactical, relationship, giving the suppliers a stake in overcoming your company’s supply challenges.
With less dependence on one or two suppliers, companies have more freedom to switch suppliers as needed to meet the needs of the moment. Optionality helps a company avoid paying a premium to keep the supply flowing and suppliers happy or losing out to competitors who "optionalized" first. Win-win negotiation becomes possible.
For example, a specialty chemical company suffering from demand uncertainty turned to SGS Maine Pointe for advice. We took advantage of that demand uncertainty coupled with down-trending energy inflation to go back to suppliers and secure price concessions by making a high volume commitment. Those higher volumes allowed the company to acquire raw materials at a lower price than their competitors. In addition, they added sourcing optionality by taking advantage of alternative sources of supply outside their usual geographic location. As logistics costs and bottlenecks declined, the company was able to take advantage of import suppliers not available in previous years.
Under guidance by SGS Maine Pointe, a European medical company also used various levers for controlling costs. We showed them how to:
- Give suppliers an increased share of their business in exchange for price concessions
- Move from individual plant-based procurement to category-based procurement to achieve supplier rationalization
- Bundle items handled by one supplier to increase volume and, again, achieve price concessions.
- Change the terms in their supplier contracts to address price variations.
- Reach out to off-shore suppliers when domestic suppliers were unwilling to make adjustments.
- Review make versus buy decisions and opportunities.
Network design and footprint optimization
Through network design and footprint optimization, companies save costs, maintain productivity, and avoid cutbacks that may be difficult to reverse in an era of labor shortages. By realigning the manufacturing and distribution footprint, using a data driven approach and strategies such as 5S, network optimization improves efficiency and capacity, preparing a company to handle increased demand when it returns.
For example, a global manufacturing company struggled with low 68.8% OTIF customer fulfillment, $27M of inventory that was moving nowhere, and about $10M to $15M in lost sales per month. With no metrics and ineffective sales, inventory, and operations planning (SIOP) processes, the company assumed their problems all originated in the warehouse. SGS Maine Pointe’s data analysis created the supply chain visibility that showed how upstream decisions were driving downstream problems.
Among other initiatives, we redesigned the operations footprint. We placed new and immediate-need products closer to the production area and redesigned the pick production zone to improve productivity, shipping and loading, and throughput. We ended third-party logistics (3PLs), which had been driving unnecessary incremental costs, and moved product back to the main facility with its optimized footprint. The results included 98% accuracy in order management, a 240% surge in productivity, a 16% drop in cost-per-unit, and an 821% improvement in dock shipping days.
Resource Allocation
Companies often deal with deflation by cutting back wages and their workforce. But low wages and unemployment increase consumer distrust even at second hand, intensifying a reluctance to buy.
By upskilling of the workforce and improving coordination between procurement, operations, and logistics, companies can realign resources and free up workers for other tasks. An owner, responsible, consult, and inform (ORCI) analysis ensures follow through on cost-saving, efficiency, and productivity initiatives. Strategies that help to break down silos enable companies to make better decisions based on timely, accurate, trustworthy data and a single source of truth.
Automation of routine tasks also frees up scarce manpower. Technology helps offset wage increases that eat into profit margins. While technology is often considered a deflation driver, its benefits are crucial to keeping companies agile in a volatile economy, one that has shifted from stagflation to inflation, deflation, and disinflation—and back again.
At a time of volatile demand, a distressed company faced plummeting productivity and shrinking margins. Quality had deteriorated to the point where customers demanded third-party inspections. SGS Maine Pointe brought a cross-functional team together to identify 37 opportunities for improvement at the plant, including optimizing measurement and inspection, enhancing and standardizing documentation, reducing scrap, and increasing the traceability of products. We built a more efficient workstream that could be handled by half as many people and then cross-trained workers for reassignment where they were needed most. We eliminated the need for third-party quality inspections, while enabling a 50% to 120% increase in productivity across the company.
Conclusion
You can rebalance and de-risk your global supply chain and footprint whilst releasing cash and improving EBITDA, even through periods of economic volatility. SGS Maine Pointe offers tested strategies of supplier optionality, network design and footprint optimization, and resource allocation to create sustainable change and give your company the agility it needs to weather whatever economic storms are on the horizon.