How to cope with uncertainties in the supply chain

Supply chain uncertainties are difficult to assess and therefore often overcompensated with safety actions

At the moment, we are seeing a lot of our clients facing a difficult situation when it comes to meeting customer demand. The underlying reason is a combination of increasing demand within certain sectors while supply chains are dealing with more uncertainty. Surely, this is an effect of the ongoing Corona crisis, where buying patterns are changing and governments are imposing lockdowns to a varying degree. However, we believe this is a part of a more long-term trend, which is being accentuated by the Corona crisis. So, the big question to ask, what should you do about it?

Well, depending on industry and company footprint, the baseline can be very different, however, for most industries, there are some common denominators. Firstly, let’s look at supply.

Securing supply is obviously key to be able to deliver. Choosing suppliers you can trust and stocking up on inventory is usually the way to go. But will this suffice? What happens when your trusted supplier isn’t able to deliver due to circumstances out of their control? Or when high inventory levels lead to increased scrapping and handling costs? The answer is, we either lose business or lower our margin – or both.

Dual sourcing has been an endeavor reserved for the largest companies with a clear sourcing strategy. And yes, you’ll probably end up paying a higher price by not consolidating your needs. And no, dual sourcing should not be used for everything. But for the items which are critical for your business, it could be a good idea. Identifying these items are also key to ensuring proper inventory management. Items that are critical should have larger buffers than something less critical. And items, where supply is more stable, can have lower inventory levels. Sure, at any given moment it is probably preferable to have a little too much as opposed to being short. However, an abundance of everything will be very expensive. So, identifying critical items, diversify the source of supply, and adapt inventory steering to item criticality are key areas to ensuring supply.

Dual sourcing image-Jun-17-2021-06-49-38-25-AM

Dual sourcing has been an endeavor reserved for the largest companies with a clear sourcing strategy. And yes, you’ll probably end up paying a higher price by not consolidating your needs. And no, dual sourcing should not be used for everything.

The other side of the coin - demand

Now, let’s look at demand. For sure, demand is a good thing, however, if you can’t deliver, it’s not of great value to you. We have already talked about securing supply and if we are only using historic data to predict the future, then proper visualization and adequate use of data is crucial. This will enable us to make YoY comparisons and drill down to spot changes in consumption patterns for specific items. However, for many companies, this is not enough, and proper forecasting is a vital part of the planning process. Usually, when talking about forecasting and predicting demand, advanced algorithms and specific tools come to mind. And surely, in some cases, this is the right medicine. In many cases though, communication and structure go a long way and is oftentimes overlooked. Sales and operation planning is somewhat of a buzzword nowadays, but we could not emphasize more the importance of setting this up in the organization. The simplicity in the idea of getting everyone to talk and aligning on one common goal is also great complexity when it comes to execution. Different incentives, sub-cultures within the company, and old beliefs are difficult obstacles to tackle. Add to this a customer which struggles with their own planning process and you have a true whiplash effect throughout the value chain. 

Let us be honest, there is no quick fix to solve the uncertainty of supply chains. Supply chains are systems of many interacting parts, and therefore many parts need addressing. But to summarize some of the more important areas, we want to emphasize:

  • Ensure proper item classification
  • Consider dual sourcing for critical items
  • Use item classification to manage inventory levels
  • Make sure the quality of data is good to enable YoY comparison and drill-down possibilities
  • Review/setup sales and operations process

 

Need a working capital expert?

Capacent has carried out over 300 working capital projects and have experience from most industries. So if your company is pursuing working capital reductions, do not hesitate to contact Erik Påhlson (erik.pahlson@capacent.se). We would be glad to make sure you get the most out of your initiative and are happy to tie our compensation to achieved results.

Author

Erik Påhlson is Managing Director at Capacent_x. Erik has experience from driving working capital projects in a wide range of industries, such as manufacturing, trading companies, utilities, and retail.

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