First the trade war with China, now the spread of COVID-19. Some companies are facing a new reality: their supply chains are becoming increasingly unstable. When events like these happen – regardless of where – supply chains can be under-prepared and at the mercy of the market.
With COVID-19, the situation is evolving very quickly. What can we do now to mitigate the impact? And once this is all over, how will we recover?
In a webinar from Competitive Insights and LeanCor, we dove into what actionable supply chain risk (SCR) strategies companies are using that position them to thrive in this disruptive environment - while protecting team members, customers, and margins.
REFLECTION: What are the good and bad actions that we've seen companies take since the tariff and COVID-19 disruptions?
When the tariffs hit, more than a third of companies surveyed by DHL had taken no actions to mitigate the supply chain effects. However, many companies did respond by expediting their shipments of products into the U.S., rationalizing SKUs or lowering discounts.
And now the one-two punch of COVID-19.
"This should serve as a wake-up call, says Competitive Insights CEO Richard Sharpe. "Shareholders will assume that earnings will take a hit from COVID-19 and the Trade War. However, they also expect companies to have SCR strategies that minimize the financial impact of these and future significant disruptions. The winners will perform noticeably better than their competitors by minimizing the effect on profit goals."
For example, the vast majority of wedding dresses are produced in China. When COVID-19 started to hit, an online bridal retailer sprang into action. In a matter of weeks, it shifted its production to Cambodia and Vietnam. It suggested alternatives from available inventories - and in a few instances - gave refunds to keep customers happy.
This company is embracing SCR best practices in a specific, decisive manner.
But this requires having good supply chain visibility and connecting the supply chain to customer consumption.
VISIBILITY: Know the specific costs and profits associated with each of your customers and products.
According to Sharpe, "SCR best practices are based on accurate and repeatable total cost and profit contribution information associated with every customer, product, supplier and the operating assets that enable the supply chain to operate."
But how do you gain these supply chain data analytics and pull all the information together?
Everyone has a standard cost to procure and to manufacture. Companies generally also know gross margins through the P&L. But that information is not detailed enough to segment customers. You really want to understand the total cost required to service your customers. That means the cost from sourcing the product, how it flows through the network, to the end customer.
Once you have all of those costs, you can look at the net landed revenue and net landed profit associated with the sale of each product to each customer.
With that kind information, you can segment customers around performance (profit), and allocate focused strategies. For example, how many product variations provide 80% of your profits? You may be surprised at the answer.
Use this end-to-end supply chain information to see where disruption will hurt the most. The data will reside in a variety of places. Sharpe says, "Use the data as it exists, and then go through a process to tie it together, and validate. With advances in cloud technology, that's a much easier situation now than even five years ago."
INFORMED DECISIONS: "One size does not fit all."
Once these financial insights are visible, short-term and long-term mitigation strategies can be evaluated in a cross-functional, informed approach. According to Sharpe, examples are:
Short Term (offsetting disruption related costs and profit impact)
- Adjusting customer service levels based on the segmentation of customers by specific cost or profit criteria
- Allocating products to the most profitable customers if production is disrupted
- Creating differentiated strategies for raising prices or lowering discounts based on customer segmentation by profit contribution
- Terminating unprofitable customers that are adding costs and diminishing profits
- Prioritizing short term mitigation efforts toward the most profitable products first
Longer Term (adding resiliency for future disruptions)
- Prioritization of continuity plans associated with the regional concentration of production of highly profitable products or product components (e.g. the impact of the COVID-19)
- Diversification of specific supply chain assets (e.g., supplier, lanes, ports, etc.) that are associated with high levels of profit contributions that would have a significant impact if it became inoperable
Significant disruptions can occur anywhere in the supply chain. What is your current supply chain risk approach? Decisions made today can have long-term impacts to your company.
Now is the time to make sure you're prepared and can recover profitably.
Review and improve upon some “low-hanging fruit” within your end-to-end supply chain.
Using our proprietary End-to-End Supply Chain Maturity Model, LeanCor can virtually meet with you to develop a current-state review of your supply chain. This will include a full roadmap with a risk assessment and improvement implementation plan.
Get started now by taking our free online self-assessment.
Results can be provided upon request.
Posted by Derek Browning
As VP of Supply Chain Solutions, Derek directs a portfolio of end-to-end supply chain projects for companies in a wide array of sizes and industries. He's trained thousands of professionals in lean, six-sigma, leadership, and supply chain through LeanCor and leading education partners. Derek complements his experience with an MBA, a bachelor’s degree in marketing, and several professional certificates.Facebook LinkedIn Twitter Google+