August 25, 2022
Time to Revise your Sourcing Strategy
The Problem Statement
Covid-19 has demonstrated to the world that the reliance on APAC as the main source for products, components and ingredients is no longer viable. The dependency on such a sourcing strategy, driven mainly by cost, coupled with the lack of transparency and risks associated with some of the supply countries in APAC, have led to major shortages in key sectors for key products around the world.
Traditional risk mitigation strategies to manage global supply chain in times of such a crisis are not sufficient any longer. The reliance and focus on off-shore and single source approaches are collapsing in face of a global meltdown of a supply base. What has started with minor disruptions due to social compliance and sustainability issues, is now a pervasive problem.
The key anchor dimension of modern sourcing strategies, which remains the cost dimension, needs to be questioned. There will be a proportion of suppliers, that will not survive this current crisis. If the remaining suppliers are still financially functional, then the state of relationship may remain a challenge depending on how the recent financial and purchase order obligations have been dealt with.
The Solution – Understanding the Risk Profile of your Supply and Item Base
Before we can begin to look at risk mitigation strategies, we need to consider the risk profile of the existing supply base as well as products or components sourced. How do we do this? There are 3 key strands: Map, Measure and Mitigate:
First of all, we need to map the supplier chain; here are some questions to consider (non-exhaustive):
- How is it structured?
- Where are your raw materials sourced?
- What are the key raw materials?
- Where are your tier 2 and tier 1 factories located?
- Who are your tier 1 and 2 suppliers, what organization is behind them and what is their financial health?
- Who supplies your competitors? Can they be used or avoided?
- Are you a large customer for them? Or do they supply a large proportion of your product
- Which logistics providers are used to transport between each point?
- Where are your regional and local distribution centres?
- What currencies are used throughout?
- How long does it take to process at each stage?
- What are the transportation times?
- What is the criticality ranking of products and components for internal and external based in an ABC XYZ approach?
- What is the sales velocity and cash generation potential of products sold?
The more detailed the information, the better the decision-making potential.
Why should we map the Supply Chain?
This is not just a response to the Covid-19 pandemic, this is something that enterprises should be doing as part of their general risk management processes. In ‘normal’ day to day business, a deeper understanding of the supply chain will allow companies to mitigate price rises and raw material shortages before their competition, providing a competitive advantage.
This can be approached using any number of ways, but a simple way to get started is to assign a risk profile to each component of the global value chain. Any concentration of risk, which could create dependency or bottlenecks, needs to be addressed in the mitigation strategy. Another step is to start analysing the risk profile at the horizon, in which you could expect some of issue to occur or how much warning you would have of them occurring.
Mitigate – Different Risk Mitigation Strategies
Sourcing Mix – Number of Suppliers
Companies want to and need to buy from the lowest cost supplier. However, having alternative arrangements in place that can be used quickly when needed can help mitigate not just pandemic scale issues such as covid-19 but also short-term fluctuations in availability or indeed currency fluctuations. Determining alternative and geographically spread sources is the key to a healthy sourcing mix.
Regional Balance – Mix between off-shore, near-shore and on-shore sources
Historically, companies have gravitated to the lowest cost sourcing in order to maximise their profit. This has seen much of the manufacturing and materials being sourced from APAC. Sourcing from a different region mainly makes sense when that region is closer to the major demand areas, allowing increased responsiveness in off-setting the higher cost base. Rather than the historic focus of off-shoring, companies need to focus on a blend of ‘far shore’ and ‘near shore’ or ‘on-shore’ approaches. Lead time, responsiveness and inventory cost can easily offset the higher cost. Also, mitigating the cost through automation capability needs to be considered.
Track % of Sourcing Content per Region and Country
Political consideration, tax and duty rate changes are a constant threat to many supply chains. Knowing which ones affect your supply chain and by how much allows you to ‘do the math’ and calculate the costs and benefits of moving some of your supply elsewhere or through alternative routes.
Ensure key Suppliers Financial Viability
The financing approach operated in a steady state global supply chain needs to be reviewed. Enabling suppliers to get access to financing well before purchase orders are issued will become more critical. Maintaining a ranking of the financial risk of each supplier, coupled with more advanced financing strategies, is a key component of a future mitigation plan.
Key Supplier Support
To create an accurate map of your supply chain, you will need the support of, and transparency from your immediate suppliers. To ensure that you are able to get this you could look to make the requirement to participate in annual review of sourcing and risk analysis part of a contractual obligation.