How to Leverage Supply Chain Design Amidst Trade Wars
Uncertainties between the world’s biggest economies continue to grow as nationalism and other geopolitical factors accelerate trade wars. Companies must face the realities of these risks and have a swift way of analyzing the impact on how they source and distribute products.
The new tariffs of 10% imposed by the U.S. on some of its trading partners are currently postponed until March 2019 and will have a significant impact on bottom lines. It is imperative for supply chains to analyze the changes, evaluate the impact, and plan for alternate strategies as these tariffs can just as easily disappear or increase to 30%. A recent study conducted by LLamasoft estimates that costs will rise by 30-50% due to economic nationalism. Companies whose supply chains don’t plan and adapt swiftly to these changes will, therefore, see their margins and market share eroding quite rapidly.
Companies with mature supply chain functions are using “digital twins” of their supply chains to evaluate relative cost and service impacts of these unprecedented levels of risks. More importantly – they also discover potential workarounds that minimize that impact. This is especially difficult for companies who have made CAPEX investments in places like Mexico and China, which now face the tariffs. These companies cannot simply halt sourcing from these regions due to time constraints and other factors. Therefore, supply chains must evaluate alternatives such as re-allocating sourcing at a relatively higher cost to the business but overall lower total cost, although margins decrease.
This is one type of complex decision companies must evaluate. Throw in other macro-economic and political changes such as Brexit and trade embargoes and the solutions become more complicated.
These type of situations have happened historically and cyclically, and what we have identified from our interactions with our customers is there are seven key supply chain elements companies should leverage to survive and thrive in this new environment of increased uncertainty and risk.
- Data-Driven Decisioning: Mine appropriate data from internal systems like supply chain costs, sales volumes, trends and forecast, capacities and constraints etc. as well from external sources, such as trends in GDP, CPI, exchange rates, housing starts that have an impact on your business. Decisions need to be based on a good balance of sound data-driven analysis and gut reaction. It is important that the company does not incur in historical accidents but more rely in engineered options.
- People: Arm yourself with the right mix of people and organizational structure to support a Supply Chain Design competency within the organization to help drive strategy. One of my colleagues, Mark Armstrong recently published an article on the hows and whys of proper organizational structure and how it relates to the maturity of the design function. One of the toughest obstacles to overcome with these uncertain times is that best decision making is not made in a vacuum, it is multi-departmental, which means there is a need for the organization to understand supply chain and its tradeoff quite well. Generate the space and leverage the technology to bring teams together to understand and then to expand on decision-making capabilities around supply chain.
- Process: Have the right infrastructure that enables the value creation process. These processes must enable appropriate connectivity to the senior leadership team, as well as looking down and across silos to enable data sourcing and sign off on results. The processes need to be inclusive of all cross-functional stakeholders
- Senior Leadership: Senior leadership’s buy-in and sponsorship of the Design team is probably the most important aspect of the success of a Design competency. The senior leadership team needs to recognize the competitive advantage that a Design competency brings to the company in both providing insight and also a vehicle to bring teams together to add value to the company.
- Looking Across Time Horizons: Most companies make the mistake of being very short term focused, often at the expense of long-term missteps. Best practice is to have a plan to optimize across all time horizons – operational, tactical and strategic, and certainly being able to shrink the time between strategy inception and strategy execution.
- Prescriptive to Predictive Analytics: When companies start to look across time horizons, they can be prescriptive for weeks or months, while moving to a predictive approach for the long-term strategy can help move ahead of the curve for the next few years. A fundamental part of predictability comes in the form of capturing randomness and risk in the supply chain, as well as appropriately representing future constraints in the form of policies, regulations, treaties, among others. It also requires consensus among different departments in the organization and democratization of smarter decision-making technologies to provide this capability. The more the company knows about the why of certain supply chain outcomes, the more it will be able to set process and technology in place to address those causals and predict outcomes with further certainty.
- Technology: Last but not least, is the use of appropriate technologies to help identify and drive continuous value to the business. This is only possible by making these processes repeatable and moving away from a pre-dominantly ad-hoc approach to solving problems. The more ingrained these processes are in the company’s DNA, the easier it is to socialize and execute on results from analytics, and the shorter the timeline between inception to execution and to value.
One of our manufacturing customers recently looked at reallocating supply based on levels of tariffs that might be put in place. Interestingly enough, this customer also started to think about how the rise in costs and prices, might drive up inflation and reduced spending. Furthermore, this customer evaluated how this would ultimately influence demand in the long run, i.e. how macro-economic variables would influence customer requirements, and thus their supply needs. They quickly realized that they were looking at three problems. The first was how to quantify the impact of tariffs on long term demand and clearly in supplier selection. The second is the possibility of long-term demand flattening out or decreasing which lends itself to the reallocation of sourcing as a better option. The third issue rising from the incapability of not forecasting the potential reduction in demand correctly, which could lead to improper levels of inventory as a consequence of fixed sourcing alignment in their network. Changes in inputs in the supply chain system can generate an incommensurable impact on the effectiveness and efficiencies of such a system, as this company found out. The key is to be able to understand what those effects are from changes that could be expected and anticipate plans to course correct for immediate execution. How to accomplish this within the company where multiple departments are involved and need to be orchestrated to make it happen, is one of the big hurdles to cross to see the value for the company.
Having worked with multiple companies in different geographies on how to better align the organization for fast response to change, I have come to realize that supply chain design is a vehicle to be able to move ahead of the curve on predictability, but more importantly to bring multiple teams together, understand what is going on and be able to work together on scenarios for solutions that are implementable in nature, and that will better prepare them to manage uncertainty. Setting up a robust competency in this discipline within company thinking and decision making is key to unlock value for the entire organization. Not an easy task, but certainly doable and highly rewarding for those who do.
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