Risk v Rewards – Making the Right Decisions in Global Supply Chain Planning
The last twenty years have seen amazing expansions in global supply chains. On the supply side, companies began looking for lower-cost sources from different geographies. Whether it was the US going to Asia or the EU going to Africa or the Eastern European countries to procure lower cost components, this concerted effort created a coordination challenge across a vastly extended supply network.
For supply chain managers the challenge became one of maintaining flexibility and the ability to respond to a dynamic market. Given extended supply chains and supply networks, how could customer satisfaction be maintained? How could the supply chain become demand-driven?
Now, as the reshoring debate heats up, companies are reevaluating their supply chain footprint. A crucial question everyone faces is: Is there a cheaper source? Or alternatively, can we keep our current source but derive added value from collaborating more closely with our supplier? In addition to cost, customer service level expectations are sky-high; everybody wants their order now. Long supply chain lead times make it tough to meet demand without piling up inventory in various places around the world. What is right strategy to balance cost and service while driving profitable growth?
The Collaborative DNA in Jeans
One global fashion company is tackling this challenge head on with their jeans supply chain, for which denim is a key resource. They’ve been able to create a demand-driven supply chain by understanding the marketplace trends around styles of jeans (for example, a bleach wash versus a particular cut). The apparel manufacturer has fostered close collaborative relationships with key suppliers around the world that allows them to share this data and effect some late-stage differentiation and postponement on materials to meet the specific demand for a particular style, color, size in a unique geographic region. This avoids building too much inventory and enables quick response to the shifts in customer sentiment. Moving the demand signal quickly from the actual customer to the supplier requires visibility to the inventory across the extended supply network and the ability to share demand and supply information. In turn, this demand-driven, collaborative supply chain helps reduce markdowns and improves margin return on capital employed. The company is not a vertically integrated brand. It doesnt own suppliers, rather the suppliers are partners in planning a coordinated demand-driven response across a third party or a partner network.
When close collaborative relationships combine with process and technology to coordinate activities across the supply chain, everybody wins. By reducing inventory across the supply chain while capturing more of the demand, not only do margins improve, there’s much less temptation to hedge inventory and much less expediting required, all of which lowers cost and disruption. When suppliers are more strategic, they operate with more certainty that they’re providing value to the business.
Extending the supply chain to take advantage of lower costs has brought an unwelcome increase in risk. Risk is a significant fact of life when moving to a global supply chain. Executives worry about the repercussions of unanticipated events (meteorological, political, economic). For many companies, handling risk means taking a more proactive management approach, working to predict issues related to single-sourcing, for instance, or plans that are set in unstable environments. It may be wise to find an alternate supplier, or buffer inventory over the next few months. Risks can be analyzed by creating scenarios that reveal potential impacts, then practical mitigation steps can be prepared in case the scenarios play out. It’s important to democratize risk information so the company can respond to it.
An integrated business planning process brings all those aspects together so stakeholders can map out what to do if these issues materialize. Teams that rely on spreadsheets quickly learn that spreadsheets won’t stand up to that kind of scrutiny, and it takes too long to bring all the data together for smart decision-making. Spreadsheet reliance adds, rather than subtracts, risk.
When faced with the challenges of global supply chain planning, remember a few key priorities. Understand the risk in your network and how to mitigate it. Sharpen your inventory strategies. Work collaboratively with your supply partners. Capture your demand signals accurately and let good demand planning drive integrated business planning across your global network.