Preparing for economic uncertainty in the supply chain
Analyst Insight: Uncertain economic times create great challenge. Companies often face increased pressure to maintain profit levels while cost and consumer trends eat into margins. The supply chain swiftly becomes an area of focus for executives to cut costs and lessen financial impact while they ride out the low cycles. While three years of the pandemic have already stressed the supply chain, the impending economic uncertainty is sure to bring its own hazards.
The best time to react to an economic downturn is before it happens. Experts are divided on when or even if a global recession will occur. However, the World Bank has stated that the two most likely predictors of recent recessions, a weakening of global growth in the previous year and sharp slowdowns in major economies, have already happened. Interest rates and inflation, on the rise in 2022, are expected to stay above recent historical norms well into 2023.
Regardless of whether a full recession materializes or not, there are several ways to safeguard the supply chain against financial headwinds without making dramatic cuts that can impact future operations. A comprehensive supply chain finance and cost strategy should be developed, and evaluation of strategy options should be completed with both a near-term improvement and long-term capability mindset. Four options for cost and financial improvement which fit both of these time-frames are outlined below.
Commodity management is harnessing the material and sustainable value trapped in the supply chain relationships in major purchases. Procurement teams can release this value by identifying and managing commodity pricing dynamically, de-risking themselves as well as their supply base. The pandemic has seen companies caught in long-term contracts and unable to take advantage of falling prices. Recent inflation has shown how quickly prices can bounce back, underscoring the need for the advanced buying of commodities.
Workforce optimization is a set of levers, strategies or methods that seek to improve efficiency, decrease cost and future-proof a workforce. The most effective optimization exercises identify the optimal combination of these levers, matching those with the strategic priorities. While there are optimization opportunities associated with mergers, acquisitions or new services, an economic downturn is a major driver of changes to people — and with it come opportunities to explore workforce optimization.
Continuous improvement efforts aim to deliver consistent processes to achieve strategic goals on quality and cost. First, understand the voice of the customer and diagnose the root causes of issues that do not align to customer value. Then, design new processes with the intent of capturing the missing value. Finally, develop controls and governance to sustain and optimize the process post implementation and achieve strategic goals of higher quality and lower cost.
Waste valorization is the process of developing techniques that generate value and opportunities from waste products and materials. Improving the efficiency of the manufacturing process can reduce the amount of waste created. Reusing, recycling or composting processing materials are other ways that can help reduce overall waste and associated costs. Additionally, companies can look externally to find or create applications for their waste material.
Outlook: Separately or in combination, these activities work to reduce the overall cost of the supply chain while continuing to provide the value that customers expect. Efforts that can be made ahead of economic slowdowns are easier to implement, more consistent and more sustainable than those undertaken during periods of hardship. Don’t wait until your organization is consumed with battling market forces before implementing changes that can drive value.