Standing in line in the middle of nowhere: Inflation and supply chain
Inflation and supply chain disruption are wreaking worldwide havoc as cost-of-living prices soar and economies falter.
The supply chain forms the backbone of production and trade, enabling the sale of products, management of inventories, and generation of revenue. Without it, these basic corporate functions wouldn’t be possible.
But over the past few years, this backbone of business has been stressed. We outsourced and globalized our supply chains to minimize costs, reduce inventories, and maximize efficiency, but the pandemic, political unrest, and soaring inflation exposed vulnerabilities. Even a boat getting stuck in the Suez Canal had a knock-on effect that led to significant supply chain disruptions across Europe.
In an increasingly volatile business environment, companies must identify supply chain risks at an early stage. They must act proactively and take appropriate steps to reduce the impact of unexpected disruptions.
This includes risk and crisis management protocols, increased transparency throughout the value chain, and rethinking the entire supply chain to take actions that are forward-looking.
Then and now: COVID & supply chain risk management
Before the pandemic, supply chain strategies focused on just-in-time practices, offshoring, and single sourcing. But when COVID hit, those strategies backfired. We quickly saw how important it is to have an overview of our most critical suppliers.
During the pandemic, our priorities quickly shifted to finding alternative sources of supply, building buffers, and overcoming transportation backlogs.
And now, in the post-pandemic period, supply chain strategies focus on dual sourcing in different geographies, nearshoring, optimizing strategic buffers, and risk-aware supplier networks.
To proactively manage supply chain risks, businesses need effective strategies for:
- End-to-end visibility & transparency
- Creating reliable redundancies for flexibility
- Dual sourcing and inventory optimization
- Nearshoring of manufacturing and suppliers
1. Getting visibility to manage supply chain risks
If companies want to make their supply chain more resilient, they need transparency along the supply chain. This includes sharing information up and down the supply chain with partners about such things as supply and demand fluctuations, capacity constraints, and sustainability data around emissions, waste, and the health and safety of employees.
At SAP Sapphire in Orlando, companies such as Pittsburgh Plate Glass (PPG) demonstrated that using a single planning system significantly improves supply chain visibility.
Better visibility has added benefits, including improved forecasting, increased inventory reliability and service levels, and smoother production planning.
2. Creating reliable redundancies
In order to be able to react quickly to changes, flexibility is one of the most important factors in maintaining the company’s ability to do business. Ideally, this flexibility extends across the entire supply chain, i.e., all companies involved can adapt to new circumstances.
To achieve this flexibility, companies need to create reliable redundancies. Outsourcing production of the same product to several suppliers, for example, increases costs but also reduces the risk of a production failure.[/h2]
In addition to creating redundancies in production, companies can minimize the risks in production planning by optimizing the entire operation using an ERP system in manufacturing. Advanced ERP technology provides insight into all production processes through real-time data access, helping businesses make informed decisions.
Modern ERP: Companies that are thriving vs those that didn’t survive
Modern ERP solutions provide companies with the flexibility and agility needed to adapt quickly to whatever happens next.
3. Dual sourcing for supply chain resilience
Global single sourcing of goods has made many products and services cheaper, but it’s also reduced the robustness and resilience of supply chains and increased risks.
Today, dual sourcing and higher inventory levels are now among the most common strategies for a more resilient supply chain, according to a McKinsey survey of global supply chain executives. Eighty percent of participants said they increased their inventory levels in 2021.
A separate McKinsey analysis that included nearly 300 publicly traded companies found an average 11% increase in inventories between 2018 and 2021, with significant increases in the high-tech and commodity sectors.
However, a larger inventory is not always the right solution, as it naturally also increases storage costs, which ties up capital. By incorporating inventory optimization strategies, companies can calculate the right location and quantity of finished goods, intermediates and raw materials.
Supply chain resiliency: Three lessons from COVID
Improving supply chain resiliency is crucial for most businesses, but doubling down on practices that limited effectiveness during COVID isn’t the answer.
4. Manufacturing and suppliers: Nearer is better
While offshoring to low-cost regions was the preferred approach from a cost perspective pre-pandemic, the trend today is toward nearshoring or regionalization. The global crises have shown that there are benefits to outsourcing certain business activities to partners located closer to one’s own company.
One benefit of physical proximity is better collaboration with workers in the same time zone with similar cultural backgrounds. There’s also a huge sustainability benefit with less miles travelled.
And due to geographic proximity, nearshoring often requires shorter lead times, which can make the supply chain more efficient.
However, to minimize risks, companies should establish close and trusting collaborative relationship with partners along the entire supply chain. In this way, they can not only minimize risks, but also jointly build a sustainable supply chain.