Most companies have focussed their supply chain design around a cost and speed dynamic, and they have been very successful at achieving this. Rarely have the procurement teams needed to consider any other paramters when selecting suppliers.
The world, however, is changing and will continue to change at a potentially quicker pace. Supply chains are highly complex and are not easy to change, so when change is required we need to make sure that it is considered holistically. For many companies this is the first time they have had to consider the design of their supply chain. Most companies have evolved their supply chains around a revenue growth story.
The world is changing rapidly, and will continue to evolve, and the supply chain design needs to change with it. The current approach will not work in the future.
Whilst the need for the lowest unit cost and the delivery speed will continue to be a fundamental consideration, we need to rethink cost to consider the total cost of supply rather than the unit price.
This is a totally new way of thinking for many companies, and it is not easy to do. It requires a different mindset and a different approach to procurement.
In a unstable tariff trading environment, the additional supply costs caused by tariffs and duties must be considered. We must also consider the potential for these costs to change over time and whether the risk of these increasing significantly impact the suppliers role within the supply chain.
We need to consider the working capital impact of the supply chain overall. Working capital effeciency continues to be a key board room discussion point and if a one party view is taken, it is likely that the working capital pressure will move to another member of the supply chain.
Take payment terms as an example. If a buyer pushes out tems by 30 days, its good news for the buyer as they will hold onto their cash for longer but for the supplier, they are going to have to wait for longer to get paid. Over time, we must expect that these costs get built into the unit price which makes the original decision to extend terms quite short term in benefits.
Many of us have sustainability fatigue and the whole topic has become too difficult to make progress on. Most corporates have invested and tried to improve their environmental impacts but it seems the impetus has been lost.
We need to get this back though as whilst there is no burning bridge today we need to expect it to be coming soon. The langauge used by the UN and other inter governmental agencies is suggesting that the agreed 2030 objective wont be met and the 2050 Net Zero goals are in critical condition.
As part of the cost calculation we should be thinking about understanding what the carbon mitigation cost would be for each supplier proposing solutions. It is highly likely the supplier proposing the lowest price may not be the cheapest when the carbon costs have been factored in.
It is quite common for supply chains to see multiple goods movements between two or more countries. Whilst this may be the cheapest way of achieving what the buyer is wanting, it creates a whole raft of other supply chain issues.
If someone proposed in 2018 that a supply chain had unmangagable risks because China could shut its borders for an extended period of time, they would have been laughed at. However, that is exactly what happened in 2020 and we cannot rule out that happening again, to China or any other country.
One strategy to minimise the risk of this is to ensure unncessary movements of goods are eliminated. There will be many situations where a supplier is importing goods cross border rather than favouring a domestic supplier to achieve the required cost targets. The costs of a more local supply may be a marginal increase but they were never considered as they were not the cheapest. If we were to design this properly, then the reduced inventory charge to the supply chain could potentially demonstrate an overall reduction in cost.
Yes, it does, but will also need to consider that that if one country is impacted, it is going to distrupt the supply chain anyway.
The real answer is to have a proper divergence strategy where the supply is coming from multiple locations rather than a single point of failure. This is a major change to todays thinking which is focused on pure purcahsing power.
Given how long it could take to bring a new supplier on line, it is likely a better strategy to split supply 70 / 20 / 10 across three distinct supplier networks. This would help with managing country distubtion, tariffs and any other issues. It may take suppliers a little longer to increase capacity but the relationship is established so the main stress has been removed.