How to get a handle on today's volatile supply chains
Companies worldwide continue to battle bottlenecks and shortages in their global supply chains.
A global shortage of semiconductors is laying low production of cars and electric products. The plastics industry has been dealing with a shortage of raw materials while cargo ships are waiting to unload in backlogged ports. And lumber prices have skyrocketed, halting construction in some places.
“Risk is a much, much bigger factor now,” said Ken Koenemann, vice-president of supply chain and technology with TBM Consulting, a firm that specialises in operations and supply chain consulting for manufacturers and distributors.
Supply chain problems that arose during the pandemic will probably continue for another six to eight months, Koenemann said. Many companies went out of business during the pandemic, and it’s going to take a while to work through the backlog, he added.
But supply chain management started becoming more demanding long before the pandemic. “This has been brewing for a while,” Koenemann said. “The pandemic was the icing on the cake.”
Tariffs, trade policies, extreme weather, and pandemic lockdowns all played a role. So did a rise in e-commerce, which was particularly steep during the pandemic.
E-commerce allows customers to buy and order through multiple channels — traditional brick-and-mortar stores, websites, or distributors — and requires not only broader supply chains to react more quickly and deal with larger variations in demand but also inventory changes.
“If you look at what supply chain management used to be compared to what it is today, it is night and day,” Koenemann said.
“In the past, it was, find a source, negotiate a contract, run material requirements planning, fill the requirements as a supplier, off you go,” he said. “Nowadays, we’re having to look at all this complexity of distribution models. We’ve got to start to look at multinational planning and how we are going to stage inventory throughout to get to it.”
5 tactics for wrestling down a volatile supply chain
GE Healthcare consolidated centres of excellence supporting various functions and processes in supply chain, such as sourcing, cost accounting, transfer pricing, and logistics, into one hub in Bangalore, said Parag Bhagat, CPA, CGMA, the company’s global supply chain centre of excellence finance manager. As a result, operations in Bangalore expanded from a handful of people to about 60.
“The intent of doing this was to consolidate our presence in India and be a strong business partner to our global teams across the world with standardised processes,” Bhagat said.
Improving supply chain transparency can help gain consumer trust and even lead to increased sales, according to a study by MIT Sloan professor Yanchong Zheng, North Carolina State University assistant professor Tim Kraft, and University of Pittsburgh assistant professor León Valdés.
What else can businesses do to help manage volatility and multichannel demands? Here are five tips:
Know what customers cost. Finance has a wealth of information to help organisations think through the multichannel process, Koenemann said. “In many cases, the finance organisation also has the analytical capability that is not prevalent in the rest of the operation. There’s a role to play in helping the operation get to and understand cost to serve.” Cost to serve goes beyond the unit purchase price and includes everything you have to do to service that customer in that channel on a specific product.
Selling through multiple channels requires expanded sources to react more quickly and deal with larger variations in demand. Optimise where to put the inventory and how to get it there.
Think global, hire local. “Providing employees with the responsibility of thinking globally and not locally can go a long way in helping the business grow,” said Bob Castaneda, CPA, CGMA, director for Walden University’s MS in Finance programme. Castaneda has held senior finance roles at American Express, McDonald’s, and Pepsi. He said mixing up the staff and hiring locally can ensure finance professionals are knowledgeable about local market issues.
Build a vendor and supplier team. Leverage the expertise and experience of local vendors, suppliers, and employees to identify issues and develop solutions, Castaneda said. Make sure key performance measurements are being met. The faster the company can source product locally, including raw material, labour, and capital, the more the company can minimise unexpected surprises, he said.
Decode your data. Bhagat suggested finance leaders re-examine how they look at data in a multichannel world. “You can’t combine two different datasets, from the traditional brick-and-mortar side of the business and the digital, and then make decisions on that combined dataset,” he said. “You need to have different KPIs to analyse each one differently. The dynamics are radically different, and they have different ramifications on forecasting and modelling.”
Quantify risk. Look at the business opportunities you lost over the past year due to the pandemic, Koenemann suggested. Add up the lost business or the incremental gross profit margin you would have captured and any costs to expedite freight. You can then use that dollar figure to determine what kind of inventory investments you may want to deal with. Having an alternative source may add a few pennies or dollars per unit cost. Now you have something to compare it to.
— Luke O'Neill is a freelance writer based in Australia. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.