Greater Valuation with a Fortified Global Supply Chain
Fortifying your global supply chain is not a post-Covid 19 matter rather a task that must be undertaken immediately. The pandemic that emerged in China and literally shutdown world commerce within months brutally demonstrated to even the most efficient large firms that their supply chain is far more vulnerable than imagined with zero time to arrange for alternative suppliers. Those who had alternative suppliers could only marginally fill the gap of the primary supplier.
The immediate urgency to create alternative suppliers is because of the unknown duration of the pandemic and possible resurgence in the near future. For this reason firms should, at lease, engage in high-level internal discussions to put an operational framework in place.
For this reason the purpose of this article is not only for company management to prepare and pre-position themselves better going forward rather also to provide a comprehensive overview of the supply chain issues and important questions to be considered.
Top-Down Engagement for Operational Change
According to the article A Deadly Disease Disrupts published in The Economist 15 February 2020, “Surveys have found that only a minority of firms across all industries regularly assess their supply chain risks carefully.” To paraphrase, “In the past this responsibility rested with mid-level managers. This question of risk now at the CEO level.”
Although the demand & supply bridge was severed, the beginnings of constructing a far more robust bridge should be undertaken immediately with direct involvement of the C-suite. Although the effort should be led by the operations department because of their experience and intimate knowledge, the participation of other departments should be considered to collaborate and provide ideas. The effectiveness of this collaboration is the relationships amongst these departments which are sometimes, and unnecessarily, contentious for a variety of reasons.
1. Filling the contractual gaps between the contract language and actual operations.
2. Understanding the mindset, priorities, perception of time and style of communication of the executive, legal, administrative, financial and operations departments.
3. The necessity to not only speak the other’s language but also to respectfully listen and understand what they mean which provides a high level of credibility.
Formally establish a new chapter in your company Disaster Recovery “playbook” specifically addressing supply chain interruptions and possible options & solutions. The solicitation from “grass roots” or “salt of the earth” personnel of the organization provide management with keen insights. This personnel often already have solutions to your current “mundane” problems and can better inform you of problems beyond the horizon.
This next level of preparedness can inspire creativity and fosters better cooperation within and between departments because an organization cannot afford to interrupt their own internal supply chain of information and participation. Organizations are like suspension bridges held up by intertwining steel cables which make them hardier against the elements.
The objective is to recreate a reliable, innovative, creative, shape shifting logistical architecture with the flexibility to maintain at minimum a reasonable flow of goods with minimal required upper-management approvals since sometimes one of the chokepoints to getting things done is administrative.
Short or Long Supply Chains?
In this new era more often than not you’ll have to think counterintuitively because the way of doing business has changed. For example, a shorter supply chain is not necessarily better. In a short supply chain if every node is part of the critical path, then each node is the weakest link. The exception would be if an alternate supplier is already under contract and has a proven track record of ramping quickly, then the chain is durable.
The second option is having two simultaneously operating parallel short supply chains neither of which have any commonalities. If one should falter, the second one can ramp up to provide some level of relief.
The third option is to maintain a somewhat longer supply chain without a critical path. Again each node can be replaced easier and rapidly through an already contracted and operating alternate supplier – like a modular arrangement.
The Curse of the Sole Source Supplier
These options are contingent on the type of industry some of which have few suppliers that make particular products or parts. The downside to sole source suppliers is that they have considerable leverage in negotiations to renew or modify the contract with respect to price and terms & conditions. In sum you’re held hostage. Escaping this vise is challenging and not necessarily a short-term solution.
Oftentimes this is a result of a firm operating ancient but still highly reliable machinery that only one firm can or is qualified to maintain and provide spare parts. This is a matter of having upper-management commit to replacing those machines with ones in which there are several qualified firms that can do the same job.
Oftentimes a firm has boxed themselves in a corner over time contractually. For example, a serious complication arises if a supplier is a sole source not from a non-competitive pricing perspective rather strictly from your firm’s manufacturing specifications. Unnecessarily tight technical specifications for non-safety items results in fewer proposers and less competition.
From the firm’s perspective if you have fewer choices there’s less chance of making a bad selection vs too many choices because the contract’s terms & conditions have already pre-selected the firm. This comes in the form of contract/proposal specifications which are worded in such a way that only 2-3 suppliers are qualified.
Additionally many firms are unable or unwilling to bid on contracts which the liability so heavily favors the firm that they propose a much price to cover the risk. Seek more equitable terms to encourage greater competition and more favorable pricing by carefully reviewing the contract specifications and terms & conditions. For this reason the firm must re-engineer the procurement process.
Future Investments, M&A and Joint Ventures
With a superior global supply chain system the firm becomes far more attractive if their operations have been thoroughly reviewed and more efficient practices are put in place perhaps for the purposes of meriting a premium price. Furthermore reducing this supply chain risk is attractive to securing more favorable financial terms such as lines of credit.
Operational Stress Test
The importance of taking all of this for the proverbial “test drive” or “war games” and having the definitive proof that it works under real conditions and more importantly at scale.
Occasionally “stress test” your suppliers by giving your secondary supplier a larger than usual order to see if they can handle that quantity. It’s counter-intuitive but think of how one should test your car’s air-conditioner in the winter to make sure it’s running OK after months of non-use.
Even if you already have an alternate supplier, establish a third supplier for the purposes of maintaining some semblance of operations. Or perhaps for special operations such as an alternate shipping method for purposes of maintain a minimally accepted inventory level to continue business, particularly to serve your high value customers. Although it will be far more expensive, it sends a powerful message to your customers that your firm is reliable in times of stress even risking taking a short-term loss.
As discussed in my SA article How Covid-19 Has Profoundly Infected The Global Supply Chain, 25 February 2020, the world economy has already entered a new era of unpredictable level of risk and the more options you have the better you can weather the storm.
Renew & Maintain Good Supplier Relationships
In this new era draconian due diligence is required with your suppliers. It’s in the interest of both parties to fortify supply lines with equally robust alternatives. Furthermore supply chain security is paramount in assessing future acquisitions. As the adage states in preparing for battle, “Nothing ever goes according to plan.”
These are the issues your customers and shareholders will demand replete with documented updates undoubtedly a time-consuming and expensive endeavor. The downside risk in not undertaking such a task is lost market share and lost customers.
Establish closer relationships with your current supplier(s) and communicate with them more often such as via teleconferencing at all levels of the business. These discussions will “frame & capture” far more timely and detailed information particularly when it’s done with a department’s counterpart: operations to operations, legal to legal, finance to finance. In this way the details pertaining to that department can be discussed in greater detail without having the meeting bog down in order to translate terminology to others.
Treat every supplier, whether a major or minor one, equally as if it’s the # 1 supplier. Karma or not, your # 1 supplier may vanish or your minor supplier grows and becomes # 1 or even buys out the # 1 supplier. You don’t want to make them feel that they exist solely for you to “break in case of emergency.” The adage, “People remember not what you said, but how you made them feel” applies in the business world. In other words establish your firm as a “trusted partner”.
Finally never “ghost” your secondary and tertiary suppliers. As your commercial lifeblood treat them as a trusted partner and they will reciprocate. Get to you’re your suppliers’ respective subordinates – the #2 and #3 in charge. Stuff happens and you’ll already have a working relationship if the boss is not available. At this relationship level you’ll be amazed how they will voluntarily provide you comprehensive information on their operations so you may gain a better risk assessment.
From an administrative perspective this information must be documented and dated in an easy-to-read format and accessible [with the proper security clearance] so that other departments can refer to it. Finally establish a hard copy contact sheet in case the electronic version is corrupted or inaccessible which will reduce stress during a crisis situation, particularly if the main players aren’t immediately available.
A robust, redundant and well tested global supply chain is a key component of a firm’s ability to conduct business and achieve a competitive edge today and in the post Covid-19 era. Although this new arrangement is an added cost it enables the firm to gain greater market share by demonstrating to current and future clients its reliability to deliver product under challenging conditions. Furthermore as a selling point these clients may be willing to pay a premium which would offset the additional cost.
[Originally published 6 April 2020]
Copyright 2020 Cerulean Council LLC
The Cerulean Council is a NYC-based think-tank that provides prescient, beyond-the-horizon, contrarian perspectives and risk assessments on geopolitical dynamics and global urban security.