You’ve seen the ships off the Ports of Los Angeles and Long Beach, stretching for miles. Your product’s machined parts are in the colored containers, piled high like Legos on the stalled cargo ships. There may not be a quick resolution to this one, and more interruptions caused by a variety of factors may occur in the future.
The experts’ advice:
BE PREPARED. BE RESILIENT.
Below are ten suggestions taken from various sources [1] listed at the end of this post to mitigate the severity of supply chain disruptions.
- Figure out the critical components for your company. Exactly which inputs will shut you down if you can’t get them? This helps you focus.
- Rethink. Can production be done a different way? Can anything be reverted to a previous version of the product that would still work for your customers up or down the supply chain?
- Build up finished goods inventory whenever you can. This strategy might be difficult if inputs are short, but when everything’s in place, it might be prudent to beef up finished goods inventories, hoping that demand will remain steady.
- Have extra cash on hand and keep in good communication with your banker and your CPA. Keep your financial reports in good order. Set your accounting and purchasing departments to find ways to decrease expenses, reduce overhead, or perhaps negotiate with suppliers for better pricing or longer payment cycles. Everyone needs to pull together. Setting aside any COGS or overhead savings for future disruptions is wise.
- Analyze the weak points in your supply chain. What are the conditions in the parts of the world that supply you? Stay current with global weather, politics, work stoppages, water shortages, etc. Also, what quality or safety issues are likely to impact your essential supplies or suppliers? Are the coffee beans you use from one area available in another country?
- Look for alternatives and backups. Is there a substitute for cane sugar? Can a different grade of steel be used? Are there other suppliers for cane sugar; or can you use a low-carbon steel from another supplier instead of medium-carbon steel? If you are not facing a shortage now, make a list of Plan B’s for any future supply chain problems, and seek answers from your designers and engineers to understand the practicality/feasibility of switching from one ingredient or part to another.
- Spread suppliers around. Is one part of the world in turmoil more often than others? Loyalty to your vendors is prudent. However, having a second or third source makes sense and reduces risk. Which leads to…
- Communicate openly with your supply chain partners. Nearly everyone is in the same boat. Good communication helps everyone understand the stresses and may lead to solutions when people combine their knowledge.
- Seek help from supply chain experts. Your business is making widgets or cakes, computers or boats. You are an expert in your field. Equally, some companies specialize in working through logistics snafus. They know who to call, what button to press, or how to help work through some of the other suggestions named here.
- Know your industry and company’s risks and your risk tolerance. Is your industry highly susceptible to cyberattacks, such as semiconductors or aerospace? Computers and electronics? Your exposure to risk varies with your product line but also with the sectors in your supply chain. These considerations require curiosity, resilience in decision-making, and flexibility in the face of mounting marketplace changes.
Research from the McKinsey Global Institute [2] (August 6, 2020) suggests that “companies who successfully implemented a lean, global model of manufacturing achieved improvements in indicators such as inventory levels, on-time-in-full-deliveries, and shorter lead times.” The report continues, “Supply chain disruptions lasting a month or longer now happen every 3.7 years on average.” The McKinsey study is worth skimming and has excellent graphs and charts showing the interdependent nature of our supply chains these days. Suppliers to certain tiers in the system produce and supply parts for entities above and below them in the chain.
Our Recommendations:
LSL CPAs recommends that manufacturers take a step back and review some of the steps above with the company’s key players from every department. Inventory levels, product offerings, and even the amount of debt the company carries can either increase or reduce businesses’ susceptibility to supply chain disruptions. Furthermore, by looking at the graph below, your organization may have new knowledge of its vulnerability and begin redoubling its efforts to prepare for future supply chain disruptions while working through this current one.
If you have questions or even suggestions to share based on your own experiences, please contact us.
McKinsey Global Institute (August 6, 2020)
[1] How Supply Chain Risk Management Protects Businesses
[2] Risk, resilience, and rebalancing in global value chains
