The COVID-19 pandemic exposed vulnerabilities in supply chains around the world and the dust has never settled. Positive cases have been on a downward trend but supply chain disruption shows no sign of slowing down. Instead, geopolitical, inflationary and environmental forces have created new challenges for manufacturers and their supply chain partners.
Continual disruption is now the new normal, and it’s weighing on profitability and making it difficult for many companies to maintain lean, agile operations. Supply chain planning is more important today than ever before and there’s good news: Manufacturers have options for mitigating global supply chain risk and keeping costs in check.
A recent QAD webinar discusses inflationary pressure on supply chains and scenarios for minimizing the financial impact of supply chain volatility.
How Have Global Supply Chains Changed Since the Pandemic?
Before the pandemic, supply chains were predictable. Manufacturers had the flexibility to search for the lowest possible cost unit and could afford to run lean supply chains. Most supply chains ran like well-oiled machines.
Everything changed when the pandemic began and virtually no enterprise was left untouched. Only 2% of companies felt completely prepared for the pandemic and 57% reported serious disruption in a recent survey. Automotive and industrial product companies were among the hardest hit.
Another survey found that the pandemic prompted many companies to move up their timelines for adopting digital technologies by three to four years. Companies with a high level of digital maturity were better prepared for pandemic-related disruption and the digitization of supply chain interactions has become a major focus.
Continual Supply Chain Disruption is Here to Stay
Who could have imagined that the level of supply chain disruption experienced during the pandemic was just the beginning? Russia’s invasion of Ukraine sparked a major energy crisis in Europe, environmental disasters and pandemic lockdowns have continued to disrupt transport and supply chains, raw material costs and inputs are on the rise in many parts of the world and inflation is creating challenges for end consumers and companies alike.
“When manufacturers planned for 2022, they did not foresee that energy prices would skyrocket by 40% in Europe and 23% in the US and that inflation would run at 8-10%, depending on the region.”
The cost of doing business isn’t what it once was, but companies often feel their hands are tied. Often manufacturers are locked into long-term contracts and working on fixed costs and revenue, yet material, transportation and energy costs continue to climb.
How Are Businesses Managing the Effect of High Inflation on Profitability?
For many, the answer is simple: raise prices and pass on some of those cost increases. This approach sounds good, in theory, but it isn’t without drawbacks – especially if accurate financial data is lacking.
Nobody ever wants to raise sales prices arbitrarily and hope for the best, but that’s often what happens when leaders are forced to estimate the financial impact of high inflation and supply chain volatility. Before raising prices, the organization should know just how high they need to go and whether the market can withstand the increase or if demand will suffer.
In some cases, companies may try to fight inflationary pressure with a focus on higher-margin products, cutting service levels for lead time or quality or changing suppliers, carriers and outsourced service providers. Some businesses may even be forced to operate at a loss.
There’s no one-size-fits-all approach to high inflation and it isn’t uncommon for a company to pull more than one cost-cutting lever. Choosing the right strategy is critical, however, because the wrong choice could cost your business market share, good relationships with consumers and supply partners, and profitability in the long run.
Why Supply Chain Visibility is Key for Supply Chain Agility
If the pandemic and high-inflation market have taught us anything, it’s the importance of being able to make smart business decisions fast. Agile supply chains enable manufacturers to approach unpredictability with speed and flexibility. They can react to sudden changes in supply and demand, adjust prices and inventory levels in real time and work closely with supply partners throughout the value chain to mitigate risk. None of this is possible without a high level of supply chain visibility.
“As soon as a change in cost, capacity, demand or supply is detected, a planner needs to determine precisely how the disruption will impact the business objectives.”
That means looking at the right metrics. Traditionally (pre-pandemic), supply chain decisions were influenced exclusively on volume-driven key performance indicators (KPIs), such as:
- Customer service levels
- Resource utilization
- Inventory policy
Value-driven KPIs like revenue, cost and profitability should also be part of the picture, especially when working in an inflationary environment.
These two types of KPIs are complementary and “will empower a practitioner to visualize the profitability impact of a supply chain decision regarding production, distribution and sourcing.”
How to Bridge the Gap Between Changes in Variable Costs and Profitability
When manufacturers leverage both finance and volume-driven KPIs in the supply chain decision-making process, they begin to unlock a more holistic view of their manufacturing ecosystem.
In addition to asking the right questions in the form of stronger KPIs, It is recommended that supply chain planners do three things to connect the dots between variable costs and profitability.
- Build an end-to-end supply chain model inclusive of procurement, production, distribution, and sales activities to pinpoint exactly where cost increases are coming from.
- Avoid using full-year average unit costs and unit prices to monetize supply chain activities. Instead, attach a variable unit cost to every sourcing, production and distribution event and use that granular data to gauge financial impact.
- Use scenario analysis to mitigate disruption by comparing side-by-side different supply chain possibilities to navigate unforeseen events. Look at the whole picture when making supply chain decisions. Be influenced by metrics that transcend operations, profitability, and risk. Consider how a plan may impact your organization’s financial and business goals
That might sound like a lot of pressure for supply chain planners, but it doesn’t have to be. The data doesn’t have to be perfect, it just needs to be accurate enough for planners to make the best choice possible given several business scenarios.
What About Cash?
Invariably times of high-inflation are followed by times of higher interest rates as central banks around the world tighten their monetary policy and increase the cost of funding. Supply chain planners are not immune. Fiscal liquidity can pose an existential risk to smaller and highly leveraged companies. In such times it is important that supply visibility extends to include the impact on cash, as well as profitability. Cash flow impacts KPIs need to be side-by-side with profitability metrics when making supply chain sourcing and serving decisions.
How to Put Financial Metrics to Work in Supply Chain Planning
Incorporating finance KPIs into the supply chain planning process doesn’t have to be difficult. The process still includes traditional supply chain KPIs such as resource utilization and service level, but also gives leaders the opportunity to forecast and consider the financial impact of different business decisions.
QAD DSCP is a complete solution that makes it easy for supply chain planners to achieve end-to-end supply chain visibility and organize that data in a way that translates to better decision-making, improved performance and cost reduction.
QAD DSCP’s Financial Planning and Sales and Operations Planning (S&OP) capabilities are particularly useful for implementing best practices. Financial Planning brings supply chain plans and finance systems together to monitor progress and drive cost reductions, while S&OP makes it easy to align sales, operations and finance functions with your organization’s broader objectives.
These capabilities, and others found within QAD DSCP, help companies reduce supply chain costs and build an agile enterprise that can move swiftly when disruption hits.
