Supply chain management: building resilience and strategies for mitigating market volatility
If supply chain shocks are new to you, you’re likely new to supply chain.
It’s almost par for the course that blips, booms, rises and falls are the parts of supply chain to set your watch by.
If you’ve been in this game a while, the times when everything’s going well are the times where concern creeps in.
History repeats itself. And just as governments rise and fall, so too do your supply chain fortunes.
In the past, you may have adopted some simple tactics to mitigate market volatility. And they probably worked, to some extent.
Maybe you simply ordered more inventory? Or ordered stock sooner than ever before, to avoid disappointment?
These days, the more robust your thinking, the better your supply chain strategy. And the better strategy you have before the disruption comes, the better prepared you are for the inevitable.
Supply chain resilience is the name of the game. And those who manage it well normally win the race. But this is a marathon, not a sprint.
So, what steps can you take to enable a brighter future for your business?
Let’s start with the supply chain basics
Before we dive into the topic of building more resilient supply chains, let’s begin with the fundamentals.
In the first section of our supply chain guide, we will explore:
- A supply chain definition everyone can agree on?
- The importance of ‘good’ supply chain management
- The pitfalls of ‘bad’ supply chain management
- Who should be involved in your supply chain decision-making process?
- What supply chain processes underpin your operation?
- How can technology support your long-term supply chain success?
What is supply chain management?
Supply chain management is an extremely broad topic. Whether you are deciding which supplier to order from or where you should allocate inventory within your network, the day-to-day supply chain decisions you make have an impact every aspect of your business.
In essence, supply chain management is all about managing the flow of goods throughout your operation. And of course, a harmonious flow of stock depends on a steady stream of robust data as well a tight grasp of the financial implications of your supply chain actions.
From the sourcing of raw materials right through to delivery of the product at its end destination, supply chain management is ultimately the value-add process that allows your business to fulfil your customer’s demand.
Why is supply chain management important?
Your customers measure you by the effectiveness of your supply chain. It’s that simple.
If an order is delivered late, arrives broken or was out-of-stock, to begin with, these are all red flags your customers look out for. The kind of red flags that could lead them to your competitors!
On the other hand, if your supply chain processes are up to scratch, you can be confident that your products are delivered quickly and efficiently with minimal disruption.
Moreover, you will be better prepared to operate flexibly around unexpected volatility to exceed customer expectations at an optimised cost.
Let’s break down some of the benefits of ‘good’ supply chain management:
- Minimise the risk of planning errors.
- Attain greater control over supply chain costs.
- Improve service achieved through better availability.
- Accelerate stock turns to ensure effective use of working capital.
- Reduce inventory levels & cut waste.
- Increase responsiveness to customer & market changes.
- Achieve stronger profit margins.
- Optimise the use of warehouse space, resources and labour resulting in a more sustainable operation.
What are the pitfalls of ‘poor’ supply chain management:
- Increased avoidable costs.
- Excessive firefighting and poor efficiency.
- High levels of excess stock.
- Increase in preventable out-of-stocks.
- Poor customer satisfaction resulting in lost customers.
- Lack of visibility & flexibility to respond to volatility.
- Poor communication resulting in dis-jointed decisions making.
What are the building blocks of an effective supply chain?
Your supply chain won’t manage itself. That much should be obvious.
To ensure your supply chain runs as smoothly as possible, you need a few critical ingredients:
- Engaged people
- Effective processes
- Flexible systems
Let’s explore the critical role each element plays in more detail.
1) People: Who is involved in your supply chain?
Your supply chain can’t exist in a vacuum.
There are lots of stakeholders with varying degrees of interest and influence.
From the customers you serve, to you team that places the order and the suppliers that manufacture your products, each plays an important role in shaping your supply chain actions.
The main purpose of your supply chain is to fulfil the needs of your customers. Therefore, it probably makes sense they are seen as a crucial stakeholder within your supply chain decision-making process.
Your customer’s expectations should drive the breadth & depth of your assortment as well as the minimal level of service you need to maintain. As the trigger point for demand (and therefore the main source of your revenue stream), this is a stakeholder you can’t afford to overlook!
Your supplier & logistics partners
“You are only as strong as the weakest link in your chain.” It’s everyone’s favourite supply chain cliché. And with good reason!”
Your suppliers are the stakeholders you count on to maintain a dependable supply of the materials, components and finished goods you need to fulfil customer demand in a timely manner.
But let’s not forgot about the trusty supply chain partners that help get your inventory from point A to point B.
We’re talking about your logistics providers, your packaging suppliers & everyone else involved in the distribution of products throughout your operation.
Strong relationships with your suppliers and logistics partners can make or break your business. So, forget these guys at your peril.
We have covered external stakeholders, but who is leading the charge internally? Well, The Management team are an obvious starting point.
As the team that is ultimately responsible for shaping the direction and the trajectory of the whole business, management decisions have a direct impact on all supply chain decisions.
From hiring the supply chain team to setting the desired level of service, the CEO and wider board of directors are responsible for setting the vision and strategy for the organization. But more importantly, they also set the tone for how this vision is achieved.
The Planning Team
Sure, the Management Team outline the business ambitions, but the planning team are there to make sure these dreams and desires become a reality.
Ultimately, the planning team are responsible for anticipating future demand and aligning this seamlessly with supply. By collaborating with other internal teams, suppliers and even the end customer directly, the planning team go to great lengths to ensure the right stock is available in the right place.
No business is exempt from volatility. Therefore, it’s also up to the planning team to anticipate disruption on the horizon and take proactive steps to mitigate risk before it hits the customer. We will explore the topic of supply chain disruption in more detail later.
The Sales Team
Your sales team are the voice of the customer. Their entire world is focused on dealing with customers. This means they have an intimate and personal understanding of your customer’s goals, expectations, and concerns.
On one hand, the sales team play a crucial role in generating demand in the first place. However, as the main point of contact, the sales team also hold invaluable market insight that can be used to enhance the statistical analysis the planning team typically rely on.
The Finance Team
It’s easy to get carried away. Sure, you could fill your warehouse to the rafters with all the stock you could ever need to satisfy customer demand. However, this approach will not do anything for your bank balance.
Thankfully, this is where the finance team comes in!
The number crunchers in finance are there to ensure the financial resources are allocated efficiently and effectively. This means monitoring the financial data and analysing the risks around investments, budgeting, and forecasting.
Given that inventory is likely to be one of the biggest numbers on your balance sheet, the effectiveness of your supply chain decisions is therefore of primary concern. As guardians of the business’ financial resource, this team will often work with teams across the business to improve the efficiency of the supply chain.
Your IT team are the hidden heroes of your entire operation.
To make good supply chain decisions, all of the people above need robust data. More importantly, they need this data delivered in a way they can utilise it.
The IT team are there to keep the systems that underpin your supply chain up and running. But when you consider how much data is flying around your business combined with all the inputs required from customers and suppliers, this is no mean feat!
2) What processes underpin your supply chain decisions?
Your supply chain is a machine with lots of moving parts. As such, there are lots of processes & workflows that are required to keep your operation ticking along smoothly.
Here are some of the core processes that underpin your operation:
This is the process of working out which products to offer your customers and in what quantities. To achieve the right balance of choice, variety, and quality, we need to think about the needs of the customers, your competitor’s product portfolio and the constraints.
To balance supply with demand, you first need an idea of how much demand you should expect. This aspect of your supply chain is all about anticipating future demand based on historical sales data, current market conditions, and customer trends.
Done well, your demand plans will help you make supply chain decisions with confidence. But, be warned, poor quality forecasts will lead to avoidable planning errors.
Determining future demand is one thing and working out how to fulfil it is another. To achieve your supply chain goals, you need to work with your upstream supply chain partners.
This means optimising orders & delivery schedules to make sure the stock you need arrives in your warehouse when you need it.
Investing in stock and then distributing it around the world comes doesn’t come cheap. Therefore, the decisions you make around sourcing and order volumes should also align with the needs of the finance team.
There are lots of levers you can pull to ensure your supply chain is as efficient as possible. One of the most important is the levels of inventory you hold.
Inventory management is a delicate balancing act between high availability, minimised cost, and optimised use of working capital. If you over-invest in stock, you will lock up working capital and put the squeeze on your cash flow. Invest in too little, and you risk falling short of customer expectations.
As one of the most important parts of the supply chain puzzle, collaboration is key. Thankfully, this is the process that ties all of the people and other processes together to maximize profits and meet customer demand with vigour.
The days of using abacuses & crystal balls to manage your operation are long gone. To cope with the complexity of modern supply chains, businesses need advanced technology that galvanises the people and processes involved.
For many businesses, spreadsheets are typically the weapon of choice. And sure, complicated, and clunky formulas are better than nothing.
But effective supply chain technology should be an enabler for your supply chain success. It should help your people make better decisions. It should help your processes run with precision and speed. It should be the glue that sticks everything together!
How should you manage your supply chain out in the ‘wild’?
So far, we have talked about supply chain management from a theoretical perspective.
On paper, the supply chain formula for success probably sounds easy. Involve the right people, set up some clever processes & support it with robust technology, and your good to go!
If only it were this simple!
Sure, if the world was nice and stable, this probably would be the case. However, we are never a few heartbeats away from the next big supply chain disruption.
Take the last few years. we’ve had what most would consider a monumental level of disruption to business.
There’s been worldwide recessions, pandemics, natural disasters, international conflict, and people in power with nuclear codes, you wouldn’t trust with your phone charger.
And so, in the next section of this guide to supply chain, we will explore how you can build a disruption-proof supply chain.
You’ll learn how to build resiliency throughout your supply chain processes.
You’ll understand what supply chain tactics you can deploy to combat volatility.
You will discover how to investigate the costs involved, and how to adapt your supply chain to cope with whatever the world throws at you.
But most importantly, you will find out how to ensure your supply chain is geared up to overcome the challenges today as well as take on the hurdles you may encounter in the future!
Supply chain strategies to combat disruption: Absorb or Respond?
Airline crews have some of the best crisis training in the world. Their response to ‘worst case scenarios’ needs to be absolutely on the money.
But rather than think about what should happen with every eventuality before take-off. They know the protocols inside out. They know who makes the decisions and how to communicate them to respond in record time.
When designing your supply chain, the same thinking can take you a long way.
Don’t spend time thinking about lightning strikes. Or fog. Or rogue missiles.
Focus on preparing everyone involved with the experience and know-how to guide you through.
But let’s bring this back down to earth.
How does this relate to the resilience of your supply chain?
Michelman & Sheffi (1983) describe two methods for achieving a resilient supply chain.
In essence, you can either absorb the risk or you can respond to it.
An absorb strategy focuses on building a protective buffer into a supply chain. Think of this as the supply chain equivalent of the crumple zones on your cars.
All that extra metal & structural integrity might feel like overkill. But should an unexpected accident occur, this extra measure could well save your life.
A respond strategy focuses on the ability to remain flexible.
Sticking with the automotive example, this is a bit like your car’s anti-lock braking system. By constantly adapting to changing conditions, this approach helps you to apply the brakes or gas at just the right moment.
Let’s explore each of these supply chain strategies in more depth.
The Absorb strategy
Achieving supply chain resilience through an absorb strategy is a common and straightforward way of dealing with disruption.
Absorbing a shock is a core competency of supply chains, but it comes at a cost.
Naturally, adding inventory or infrastructure can give you a buffer from demand or supply shocks, and create an advantage over competitors.
You can also create a long-term advantage with an absorb strategy, by giving protection for markets or customers, leveraging expansion opportunities, and exploiting competitive situations.