How are you handling your supply chain strain?
April 29, 2020
By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader
Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.
One of my mother’s favorite things to say to me when I was frustrated by something was, “Think of it as another learning opportunity.” By the time I made it to adulthood, the last thing I wanted was “another learning opportunity.” Yet here we all are.
There are many ripe learning opportunities thus far in 2020. COVID-19 has plunged us into surges and droughts of business alike. One of the most pronounced areas to be impacted is our supply chains. The interconnectedness of our supply chains was, pre-COVID, an unspoken given that most of us took completely for granted. The pandemic is now shining a stadium-sized spotlight on the vulnerability of our supply chains.
For years, best practices in purchasing and inventory management have promoted efforts to:
- Centralize inventory in select key locations rather than many disparate locations;
- Strive for “just-in-time” stocking levels, supported by strong demand forecasting systems;
- Maintain tight safety stock levels;
- Consolidating vendors to achieve better pricing; and
- Outsource production to lower cost regions of the globe.
Each of these strategies are sound methods for managing cash flow and utilizing a company’s assets. Yet, in the current COVID-19 world, cracks have emerged:
- Manufacturers and retailers that are dependent upon suppliers based in China became the “canary in the coal mine” for supply chain disruption. Wuhan, China is a major manufacturing center. Known for its production of telecommunications, fiber optics, semiconductors, automotive parts, medical supplies and equipment, and pharmaceuticals, Wuhan provides many U.S. companies with lower-cost alternatives than can be sourced domestically. When it shut down and its inventories dwindled, U.S. businesses felt it.
- Outsourcing manufacturing to international locations has diminished domestic capabilities to produce similar products locally. Those plants and capabilities literally left town.
- Use of “just-in-time” methodologies across all industries, including health care, set the stage for in-house supplies of inventory to deplete rapidly. Replenishment is painfully slow, if even possible.
- Many companies, specifically food manufacturers, have designed their production floors to be highly productive with employees positioned elbow-to-elbow in order to maximize production capacity. Plants that are still able to function as “essential” are now facing worker illnesses that are causing production reductions and temporary plant closures.
- Clogs in the food chain are having broad implications as farmers destroy product they can’t get to market; production is slowed by staffing issues while food pantries and grocery stores are running low.
- Stay-at-home orders have slowed demand in some areas and created surges in others. Demand forecasting is now an art as the systems’ historical data is likely irrelevant. And yes, in this case “art” does mean SWAG.
- Some suppliers will simply not survive long enough to see the recovery. Companies that depend upon such suppliers could find themselves scrambling for alternatives.
I don’t recommend throwing the baby out with the bath water. These strategies have a role to play. However, I do believe that the canary is singing its song loud and clear — it’s time to do some serious analysis of your company’s supply chain systems.
You and your team are actively managing the supply chain now more than ever. Armed with the action steps below, you will be able to better bolster the chain strength, anticipate issues, and answer:
- How secure is my supply chain?
- If it is impacted by the pandemic, how quickly will my suppliers rebound?
- Am I confident my key vendors can continue to be able to supply me with product(s)? Does my answer depend upon the timeframe considered?
- Do we have a plan if the product becomes unavailable? If yes, what is it? Have we vetted contingent suppliers? (If no, let’s start researching alternatives now!)
- Which alternative vendors should we begin to work with to diversify our access to key materials?
Step one: Establish rating criteria that your team agrees on for measuring supplier performance. Apply these criteria when assessing a vendor including:
- Key base requirements;
- Must-have features/capabilities;
- Deal-killer issues; and
- Other criteria important to you, the team, and ultimately your customers.
Set up a spreadsheet to help track and rate performance. Be diligent when using it to measure performance of current and prospective or contingent suppliers.
Step two: Identify the priority products and services. Focus on your higher volume and/or mission-critical products first. Specifically identify what is being purchased from the company and:
- Current and future demand;
- Current levels of inventory;
- Potential substitutes (from current or other vendors);
- Anticipated lead times to re-order, if needed;
- Number of current suppliers used for a given product; and
- Factors considered within a “just-in-time” framework that warrant adjustment.
Step three: Mine your inventory, manufacturing, and purchasing systems for pertinent data points including:
- Trends in units purchased, used, returned, and on hand;
- Lead times, on-time delivery statistics, and current safety stock levels;
- Quality issues or other vendor performance issues reported; and
- Interconnectivity of products such as how many bills of material a given product is used in.
Step four: Review your current vendors for these priority goods and services to identify:
- How well they are weathering current conditions?
- What degree of quality and timeliness were they providing you with pre-COVID?
- What impact you anticipate COVID having on their ability to meet your needs over the short term (now to three months), near term (three to 12 months), and long term?
- Where are they at with their own suppliers? How sensitive are you to the disruption of your suppliers’ inflows?
- Where are your current suppliers located? How have the logistical issues contributed to the current situation, particularly considering recent international and domestic fulfillment issues (closed borders, closed “non-essential” businesses, labor shortages due to illness, etc.)? Are there comparable providers closer to home?
Step five: Analyze the scoring. What does it tell you? What new priorities have emerged?
Step six: Build your action plan for strengthening your supply chain in the short-term and in the long run, including:
- Contacting current suppliers to check in and make sure they are doing OK. Work together to build a purchasing and fulfillment plan for their products and/or services;
- Researching back-up and/or alternative suppliers;
- Piloting new products and/or relationships which may include engineering, prototype production, test runs, and migration to an ongoing arrangement; and
- Updating demand forecasting and vendor performance management systems for modifications in purchasing and inventory management assumptions, parameters, and metrics.
Whether your company has been hit with a surge or a sharp decline in demand, your supplier relationships, inventory supplies, and the systems you use to manage them warrant a review and refresh. Yesterday’s assumptions no longer apply. Today is a new day. Embrace these six steps to stabilize and strengthen your supply chain.