• Is your supply chain fit for your purpose? Six areas to drive efficiency and develop resilience

Is your supply chain fit for your purpose? Six areas to drive efficiency and develop resilience

23 September 2022

Original content provided by BDO United Kingdom

Supply chains and their design have always been about balancing efficiency and cost with resilience. Until relatively recently, the availability of resources and the ability to move goods across the globe could be taken almost for granted.

Clearly, the conditions that underpinned the global just-in-time supply chain have changed radically. A range of issues from inflation and energy costs to availability, cross-border friction and environmental change are testing the resilience in a way that is forcing businesses to revisit their priorities when it comes to supply chains.

Supply chain managers have always been key to ensuring that the customer gets what they have paid for, when they want it, as cost-effectively as possible. This has been amplified to deal with the after-effects of the pandemic, deglobalisation, the climate crisis, inflation and rising energy costs.

This article outlines six areas of your supply chain management that can contribute to creating a resilient supply chain that is both efficient and able to adapt to challenges as they arise.

Addressing the main components of risk in your supply chain at an acceptable cost is essential for the success of your business. It will have a direct positive impact on your bottom line but will also protect you from reputational and brand damage.

1. You can’t outsource the impact of risk

It is almost certain that your supply chain will experience disruption at some point - but knowing how much, when or where is hard to predict. Outsourcing is seen as the key to cutting costs, but it cannot reduce the risks of supply chain disruption. When looking at how supply chains are managed, a common mechanism is that the supplier or provider flags any issues, which relies on the supplier having a robust supply chain monitoring mechanism. While contracts and insurance can provide financial protection for your business, what they can’t do is prevent the reputational and brand damage that might occur from supply chain failures, and ensuing loss of customers and market value, let alone the cost of response and recovery. Near shoring or on shoring global supply chains can carry an operational benefit, but it does not change the strategic risk your business carries.

Eliminating risk from your supply chain is almost impossible. The most important thing is that you’re fully aware of your business’ risk profile, understanding your exposure to risk and how risks will be handled.

2. Can you navigate your Supply Chain?

Mapping your supply chain  will support your ability to understand what risks you face and who will manage them. When a disruption occurs, the speed of reaction is critical to minimising resolution costs, loss of revenue and managing the customer base to prevent them moving to a competitor.

Knowing exactly where your suppliers, particularly beyond your direct suppliers, are located will provide insight to the flow of goods, modes of transportation and the jurisdictions involved. It can help you reduce inefficiencies, duplications and pinch points and help you put in place strategies for mitigating risk. It may be that a supplier you consider to be low risk is itself exposed in a different sector which impacts your vulnerability.

An added benefit of mapping your supply chain is the increased confidence in the reliability and accuracy of tax and customs declarations. Creating a digital version, known as a digital twin, of your supply chain that reflects what you know and how changes will affect operations can support resilience planning and scenario analysis. You should reconsider how you categorise your suppliers and review them by division, country or product category. You can also segment by revenue, the most critical or scarce component or the most vulnerable suppliers.

You need to be sure that the people who manage any part of your supply chains understand their responsibilities and are experienced and trained. Even the most sensible processes will fall down if they are not fully understood and implemented.

A huge range of functions will have a vested interest in how supply chains are managed. They should all be actively involved in supply chain management and invited to work across silos. This will promote better understanding of supply chain risks and encourage all to be more efficient and agile.

3. ESG and Regulatory Compliance

Ethical credentials are becoming key elements of most businesses’ brands and reputation. Your business should be able to report confidently that your ESG strategy is reflected in your supply chain, in your contracts, and that your business is compliant with the raft of legislation that exists.

You may also be required to report to regulators or demonstrate compliance with externally imposed standards to be able to compete for and win business.

4. Data, data everywhere

In a world where data is driving behaviour, informing decisions and identifying inefficiencies we need to understand, manage and importantly, trust, the data we use. Artificial intelligence and machine learning Enterprise Resource Planning (ERP) systems are perceived as the panacea to keeping on top of sales and operational planning, managing inventory, procurement and suppliers not to mention financial performance.

Even for a relatively simple business structure, the time and effort to select and implement such a system can be lengthy, costly and not achieve the necessary ROI. When assessing whether your business could benefit from upgraded data management systems, you should consider: What is the scale and complexity of your data? What jurisdictions you operate in? Do you understand the systems, applications and software you already have in place? Does your workforce have the skills to oversee, implement and start using a more complicated system?

It may be that immediate needs can be served by introducing automation, exploiting functionality of existing systems and software, or introducing a relatively inexpensive package that can be integrated and form the start of your business capability transformation journey.

Even the most expensive and sophisticated systems can be rendered ineffective if the data inputted, manipulated and reported is inaccurate, incomplete, late, unreliable or vulnerable to attack or unwanted manipulation.

Being proficient in managing, storing, securing, processing and moving information and data has never been more important. The implications of a cyber attack are significant, as a result of GDPR legislation – not only do they generate negative PR for your business, or can result in loss of confidence and sales, but can incur hefty fines and disciplinary actions from regulators. No matter how sophisticated your data management systems, having the cyber security credentials to protect them has never been more important.

5. Contracts: Let's not forget

Contracting can sometimes be a ‘let and forget’ exercise, and it is not uncommon for organisations to not know what contracts they have in place, nor where they are. This is unhelpful if there are automatic renewal clauses or cost increases built in. Working collaboratively with suppliers helps you receive what you contract and pay for and creates conditions for mutual support in the event of disruption. Managing your supplier relationships well will provide experience to inform future procurement decisions.

All too often, contracts lack sufficient detail to be enforceable without negotiations and subsequent costs. They can also be drafted without sufficient engagement with suppliers or without considering the potential impact on customers. In short, many businesses could improve the management of their contracts.

The challenge for the business is to ensure that the right people are involved at each stage. Who should be involved in the setting of requirements? Who should lead contract development and letting? And who else should be asked to contribute?

For example, the team tasked with implementation and delivery are often excluded from the contract process. Given that contracts form the basis of managing costs, forecasting budgets, assessing revenue profitability and can influence pricing, this can lead to problems further down the line.

Your existing contracts may have been drawn up during a period of relative economic stability. They may not allow the degree of flexibility needed during times of economic instability and disruption. Businesses rarely spend enough time scrutinising the contractual terms and what they might mean in different scenarios. A more forward-looking and proactive approach to contract management  will reduce your business’ risk profile.

6. Remove the Complications

Logically, the wider the range of products you offer to your customers, the larger your supply base is. Does the effort you put into getting sales, client management, supply chain management, financial and performance measurement and planning, justify the level of sales? If your limited sales volume is disrupted by supply chain issues, you are likely to have income problems on your hands.

When looking at your supplier base, it is highly likely that roughly 80% of revenue is centred on roughly 20% of your suppliers. Spending time on the other 80% may only be adding to your cost base. You should always consider the impact on working capital, the increased storage and inventory management costs as well as the people cost when assessing the viability of products.

On top of this, you should consider the vulnerabilities the product produces in relation to cost management, fraud risk, systems capacity and time to needed to make decisions.

Regular reviews of your supplier base, working capital and revenue factors will create opportunity for savings and efficiencies. They may also help you simplify your supply chain which in turns supports agility, flexibility and aids efficiency.

If you have any questions, contact Pamela Gillies from our local team.