Resiliency, or the lack thereof, has been an underlying issue global businesses have faced for quite some time. Brought to the surface by the recent pandemic and its continuing ripple effects, companies across virtually all industries have come to the realization that they were unprepared for the unexpected.
Persistent and sustained issues in a company’s supply chain can have financial implications and negative reputational risks, as well as cause production defects, product quality challenges, and even increased operating expenses such as higher energy and insurance costs. Gone are the days of choosing a supplier solely based on the lowest cost. Instead, supply chain leaders must now prioritize stable and reliable service to prevent the ripple effects of a supply chain disruption.
These supply chain challenges have prompted companies to recognize a “magic formula”: Stability leads to dependability for customers, consistency for planning and execution, and predictability for pricing. By prioritizing long-term sustainability and stability rather than chasing the lowest immediate cost, companies can strengthen their logistics resiliency which will directly improve their bottom line.
Problems that Arise without Stability
Supply chain disruptions create a number of ripple effects ranging in impact. Not only is each link of the supply chain dependent on another, but many company operations are dependent on its overall stability.
Increased supply chain segmentation, which analyst firm Gartner defines as “the dynamic alignment of customer channel demands and supply response capabilities optimized for net profitability across each segment,” has been favored as a low-cost option, but companies are reconsidering whether these benefits outweigh the risks and impact of an isolated supply chain. It must be acknowledged that COVID-19 was a high-impact and low-probability event, but three years later, companies are still scrambling to deal with the effects.
One of the “weak links” companies contend with is a lack of visibility. Isolated supply chain functions prevent a company from knowing where products and services are within the supply chain flow. To combat this, many companies are pushing for increased visibility into their upstream and downstream supply chains and looking for ways to build more stability.
Transportation is another area of vulnerability. Transportation solutions that focus on the low-cost provider tend to reduce quality of service. Long-term customer retention and increased revenue are critical to a company’s profitability, so transportation decisions should be centered around both service and cost to optimize the total supply chain performance.
Unforeseen circumstances, such as weather phenomena or social or political upheaval, are harder to plan for but have the highest potential for disruption, especially in the realm of sourcing. Sourcing strategies focused on single-source, low-cost partners significantly increase the risk of losing access to the sole supply link when major disruptions happen. Establishing an appropriate supply chain risk management program is necessary to address these potential pitfalls.
No matter the reason, a lack of stability increases risks and creates production delays, delivery interference, and ultimately, customer dissatisfaction. To avoid these common issues, prepare for the unknown and retain customers, companies need to re-strategize their logistics operations to be more resilient against potential and inevitable breaks in the supply chain.
How to Achieve Stability
The standard methods of reducing supply chain vulnerability include localized sourcing, diversification of the supply base, and increasing inventory at critical locations.
An additional way to promote stability is to select the right business partner that can help plan for and mitigate any changes that could affect your supply chain and business profitability. This is where a group purchasing organization (GPO) could be helpful.
GPOs combine aggregate purchasing power across their membership to negotiate lower rates with suppliers for services they provide in both direct and indirect spend categories. They can continuously look for ways to achieve lower price points, better service, or a combination of both by leveraging pre-negotiated, national contracts and aggregated sourcing within a wide portfolio of specific verticals. Some can even set up custom sourcing contracts for more niche product and service categories.
Stability also requires complete and total visibility, both internally and throughout the supply chain. Everyone involved—raw material suppliers, component suppliers, internal supply chain nodes and carriers—need to have real-time, equal and accurate views of each step as products move through the lifecycle of a supply chain flow. For instance, they need to know where a widget is in the production process, or where the raw materials are that are used to make it to properly plan a timeline and staffing requirements for production. The GPO will take a holistic view of the supply chain, not just looking at price negotiation, but also how to make each step of the supply chain more efficient to bring the highest value to the member.
A strategic GPO will engage with supplier partners who also have this view. With their combined industry expertise, they can assess and analyze every touchpoint in the supply chain for weaknesses, identify solutions and create an improvement plan to move forward. Then the suppliers can help implement those solutions. This advanced visibility drives efficiency and effectiveness so that key materials can be delivered to stakeholders at the right time, place and price.
Although the process of creating stability may take more financial investment, it is worthwhile in the long term to create a secure and sustainable supply chain with the resiliency to withstand major disruptions.
Be Consistent to Create Value for the Future
All businesses need to have a long-term strategic plan, and stay consistent with that plan, to create stability and maximize value. Though markets have normalized, future shake-ups are probable, so companies should be taking steps to fortify their logistics operations. Additionally, they should review those processes regularly to make sure they still hold up.
Logistics is fundamentally intertwined in business operations, outputs and profitability, so it can have a direct impact on the way companies are externally perceived. By ensuring resiliency, companies will be better equipped to handle any operational threats—and associated reputational threats—in the future.
Dave Pollard is assistant VP of logistics at CoreTrust Purchasing Group, a commercial sourcing agency.
