Of trade wars and supply risks

Of trade wars and supply risks

May 6, 2018 Off By Aval Sethi

Efficiency gains, in the backdrop of expected trade wars and inflation, are likely to create a first-level barrier to supply chain management.

Owing to the changing trade environment, rising inflation and dire-threat of a trade war, executive boardrooms are feeling the heat in maintaining stable relations. This has led to a sword hanging over their heads when it comes to supply chains. The conventional cost-saving measures by lenders are no longer working as the pressure develops on earnings. It is a standard practice to continue doing what you have been doing in such situations and not leave the business. But, that has only contributed to the problem becoming acute. However, a few of the market people have doubled up their efforts and reduced their exposure to supply chain risks by taking an integrated view of operations which includes manufacturing, supply chain management, product design and procurement rather than cutting costs silo by silo.

For those manufacturers who get it right, it is a big opportunity, as a Bain research shows, that following an integrated approach can help companies generate 15-30 per cent net margin improvement as compared to 5-10 per cent of savings in each category. These can be a boon for a company under stress and can aid the business significantly in normal conditions, especially if a company ceases to occupy certain markets or if the manufacturing site is located in a new high-cost zone. A trade war, on the other hand, could damage the company’s assets or leave the company with stranded assets. Leadership teams can identify the alternatives through an integrated view of operations which subsequently means increase in the company’s resilience with improvement in performance.

The motto of procurement is to buy better and spend better and that is what procurement companies look to do in terms of supplier selection and price negotiation. Although, these approaches help companies buy better, they may not help much in the middle of a trade war with rise in input prices – companies need to devote thought to what they pay for instead of what they buy which can make a huge difference.

In fact, research studies suggest that a company’s productivity more than doubles if the spending is better which may include either systematic organisation of demand or redefinition of nature of work. Consider, for example, to safeguard the company from uncertainties, the company might extend the time period for renewal of laptops or mobiles of employees from two to three years. Steps like these can help control costs to some extent.

Does in-house manufacturing reduce costs? Or does it make more sense to buy from other companies? These are some of the questions that the company needs to ponder in order to improve procurement efficiency. During a trade war, in-house manufacturing can help companies to rely on the internal staff rather than overseas suppliers. Having near-shore vendors for overseas suppliers can also reduce the company’s exposure to trade wars. Having substitute of alternative products instead of relying on key vendors can also help companies to manage procurement for lower costs under duress. For instance, there is a shift to standardised designs that rely on software for any kind of customisation when it comes to satellite communications companies that were earlier using custom-designed hardware based components.

Saving costs for supply chain: Distribution and transportation network

It is necessary to pay attention to what kind of suppliers are giving the order of delivery – whether neighbourhood stores or large retailers, which many consumer product companies overlook. If companies can provide transport and logistics according to different price points and needs without following a one-size fits all approach, it can help companies to improve efficiency, have more savings and improve the performance of the supply chain as well. For instance, on one hand, consider Group X requires low-cost 48-hour delivery, on the other, Group Z could require more expensive overnight deliveries for all goods.

Another way to have more savings is to have a selective approach to product planning. Low-volume products with less certain demand don’t require the same planning process as say, high volume stable and decent demand. To lower the burden on forecasting managers, many companies are replenishing the stocks at timely intervals on their own so that the managers can plan and focus better on those that don’t have the requisite demand.