Inflation is spiking, supply chains remain constrained, freight rates are near all-time highs, and parts for production remain elusive. This feels like the same state we were in 12 months ago (one year into the pandemic), and nothing seems to have changed. Our 2022 AlixPartners Disruption Index shows that 69% of CEOs are concerned with supply chain disruptions, but less than half are taking long-term action in response. Instead, crisis management appears to have become the new normal for the foreseeable future.
In today’s environment, companies are faced with three challenges:
- Finding parts to meet the production backlog
- Inflation defense and margin management
- Building resiliency into their supply chains
At first blush, it would appear that if companies can weather the immediate problems of parts shortages and inflation pressures, they would be able to focus on building resiliency as the business climate stabilizes. However, with no immediate relief in sight for shortages and inflation, companies might be better served by addressing longer-term resiliency while tackling the issues that are front and center.
We've identified several keys to success through our work with many companies facing these challenges.
Our experience, even in this environment, shows that it is possible to find parts, but it requires companies to exercise different muscles and be agile in their response. This includes:
- Building accurate and dynamic visibility into shortages
- Ability to find alternate secondary market sources
- Fast internal approvals & payment mechanisms to secure spot market parts
- Willingness to leverage technical changes as solutions
The key to agility in large companies is how quickly and effectively they can stand up a “Control Tower” that has the capabilities and the executive empowerment to coordinate decisions across functional horizontals (Demand planning, Production planning, S&OP, Sourcing, Logistics, Finance, and Engineering) and Product / Business Unit verticals.
Inflation defense and margin management
Record-setting commodity price increases over the past 24 months have meant that companies have to deal with and absorb price increases from suppliers. At the same time, companies have to work with their customers to pass-through price increases to ensure margin preservation.
Unless this is done in a structured and dynamic manner, the effort to manage margins will result in suboptimal margin capture. Successfully managing margin in today’s environment requires companies to develop strong capabilities in three key areas:
- Dynamic input cost mapping: Companies need to be able to calculate product costs based on rapidly changing input costs to understand the true impact on margin. Also, companies need to understand the true cost impact on their essential purchased parts and be in a position to negotiate with suppliers to defend against unwarranted cost increases;
- Supplier negotiations: Companies should defend against supplier price increases with effective processes and structured negotiations (supported by should-costs and analytics) to mitigate inflation;
- Cost-to-Price: Companies should implement strong processes and manage undefended inflation through effective pass-through mechanisms to the end customer.
Supply chain resiliency
Parts shortages, long delays, and volatile inflation have highlighted the risk in supply chains and the need to build more resiliency to safeguard against similar situations in the future. Building resiliency requires companies to pursue risk mitigation across three dimensions – building flexibility into the existing supply base, developing visibility into potential future disruptions, and building agility into organizational processes.
- Structural Risk: Companies’ current supply bases reflect the desired end state due to deliberate actions taken in pursuit of specific objectives. These objectives could have been cost, exposure to certain geographic regions, technical requirements, localizations, or other discrete objectives. To build resiliency, companies will need to revamp category strategies with pragmatic solutions that build flexibility into the supply base.
- Event Risk: Certain categories (e.g., semiconductor chips, specialty chemicals) are more susceptible to global events because specific upstream nodes in the supply chain (Tier 1 through X) are more at risk from these events. For these categories, developing upstream supply chain visibility and monitoring the effects of global events on these supply chain nodes can serve as leading indicators of potential issues. Having early visibility into potential problems will provide companies the opportunity to develop point solutions to reduce the effect of the disruptions.
- Organizational Risk: Tackling a disruptive supply chain situation requires organizations to stand-up empowered SWAT teams supported by executive leadership to make cross-functional decisions (Sourcing, Finance, Engineering, S&OP) to find solutions. Also, typical sourcing processes designed to be restrictive for supplier qualifications will need to be viewed from an additional lens of the speed of qualification, development, and collaboration to mitigate supply chain bottlenecks. To summarize, companies will need to build agility into their organizational processes and policies to mitigate these risks.
Those companies that will succeed are the ones that recognize the need to focus on the short-term problems while developing the resiliency to battle the next disruption as clearly it is no longer a question of if but when.
Read more of our insights on managing supply chain disruptions here.