“Supply chain disruption” is a term that has been overused in boardroom talk tracks and analyst/market reporting. While increasing inventory is a fix many have tried, it is not a long-term solution because it leaves companies flat-footed and constantly reacting to changing demand. This problem is magnified by uncertainty around recession, inflation expectations and rising interest rates. The decisions companies make now will significantly impact their ability to not only weather the storm but emerge as thriving enterprises. Learn what steps you can take today to improve your supplier relationships and ensure the best return on investment (ROI).
- Procurement executives indicate that supply disruption will be pervasive in the coming years.
- Companies often respond to expectations of disruptions by increasing inventories.
- Increasing inventory is risky in a business climate with looming concerns over recession and rising interest rates.
- Suppliers struggle to honor contracts or provide services due to labor shortages and supply chain issues.
Revisit supplier segmentation and strategy
While it’s common knowledge that not all suppliers are of equal importance to a company given the changes in supplier base, it may be prudent to align on the segmentation and focus placed on each supplier. If weighted criteria are already in use, adjust the prioritization of criteria with assurance of supply in mind. Ensure that key suppliers are mutually agreed across the business. Understanding how each supplier is managed should be a critical first step any procurement or operations team takes when building a plan to weather the storm.
Evaluate supplier stability
With all businesses under pressure during these times, understanding the stability of your key suppliers is also an important next step in evaluating the assurance of supply. Assessing financial stability and risk is not enough. Taking the extra step to evaluate their supply chain and ability to retain talent is increasingly important.
Ensure incentives are aligned with suppliers
The number of underperforming suppliers or even those voiding contracts overall has increased. In this environment, holding suppliers to contractual obligations has been difficult, and applying pressure can create tension, leading to potentially poor future performance. Finding innovative ways to align supplier incentives and prioritize service outside of contractual penalties is, perhaps, the best way to assure supply.
Evaluating talent retention
Talent retention is important for all businesses, not just for continuity of services, but especially to suppliers. Turnover can present significant performance disparities as one individual is swapped out for another. Regardless of talent and capability, personal relationships and trust cannot be quickly rebuilt or replaced. In light of the “great resignation” in past years, many resources and materials have been published on how to keep a workforce. Using those learnings and finding additional ways to ensure the team interfacing with your suppliers remains intact is critical.
Provide team training/guidance on supplier relationships
Discussing the tactical nature of managing a relationship is not always front of mind for executives, however, it is in the trenches where decisions are made. Ensuring supplier relationship teams have received proper guidance and training on how to manage those relationships may be one quick way to assure supplier relationships are maintained.
Introduce team relationships where appropriate
Many companies have single representatives to manage each supplier. While this is efficient and provides clarity in accountability and communication, having designated backups or enabling a team of people to coordinate with suppliers can ensure continuity of supplier relationships when inevitable employee turnover occurs.
Identify and implement plans for backup suppliers
Aside from revisiting sole-source suppliers, assessing all critical categories to identify potential backup suppliers and revising lead times on a more frequent basis are critical steps to ensure that procurement can quickly provide alternative options when issues do arise.
Assess potential for finding material substitutes
Taking this opportunity to better partner with design, engineering and quality teams to spur innovation may be one additional step that procurement organizations can use to provide added value to the organization. Understanding and proactively identifying key materials that are expected to be in short supply or face significant cost volatility allows for cross-functional solutioning of qualifying alternate parts, materials, or services to replace those that may be become unavailable or cost prohibitive.
Evaluate where decision-making authority and measurement occurs within the organization
Decision rights for ordering and authorization are often only addressed after inventory levels have become a problem. While edicts to limit inventory levels then are levied across the full organization, frequently, they do not address the differing inventory needs across the company. Evaluating the decision rights now and identifying the levers that can control inventory increases proactively – before it becomes a problem – should be a key consideration for organizations as inventory levels have been rising and volatility is expected to increase.
Revise current stock cost calculations and ensure consensus on risk tolerance levels
Even for decentralized models for inventory responsibility, creating centralized guidance, models, calculation methodologies and the like can help those making buying decisions to stay on course to achieve strategic company aims. Creating and effectively deploying those tools and communications should be a priority for many companies looking to ensure inventory levels do not bloat, and inventory investments are made strategically to balance service and costs.
Steps You Can Take Today
With a multitude of levers to pull, it can be difficult to understand how to best assess and prioritize the levers that will provide the greatest ROI to your business. Identifying the road map forward and getting a clear understanding of the expected value each step can offer your company is the best starting point. Establishing your current state and where your company leads and lags, will help determine which of the approaches below should be priorities for your organization:
- Perform a holistic supplier evaluation of your supply base (both suppliers and existing contracts)
- Focus on risk-mitigation sourcing
- Develop or refine a supplier relationship management framework
- Create or refine business case templates for procurement and business initiatives
- Evaluate or restructure your integrated business planning process
- Perform an assessment of your procurement organization and training plans
Our experts at The Hackett Group can help identify the best course of action with the strongest ROI.
Reach out to us to discuss how we can help you optimize your procurement organization and propel your journey to becoming a world-class procurement organization.