5 Actions You Can Take to Manage Global Supply Shocks

Increased global supply chain risks are creating increasingly uncertain circumstances for companies across the world. Here’s how you can navigate this new landscape and create a more sustainable business.?

The combination of lockdowns in China, the war in Ukraine, and increased consumer demand has created a perfect storm for supply shocks across the world. Unfortunately, there is little hope for immediate relief on the horizon, meaning companies across a wide range of industries will have to adapt and prepare for a more uncertain future of product and essential supply procurement.

Although the forces driving the current crisis are complex, the impacts for companies already grappling with rising inflation and a looming recession are simple and harsh:

• Reduced ability to acquire products
• Reduced ability to acquire essential materials for manufacturing
• Increased costs of procurement (e.g. shipping costs, cost of product/material itself, etc.)
• Loss of business due to an inability to provide products and services, including for critical products and services like those for healthcare.

Nevertheless, as a business leader, there are several ways you can rise to this challenge and guarantee your business’s success in the years to come. Here are five actions you can take to manage the current global supply shocks:???

Action 1 |? Additional Sources for Critical Supply Materials

Earlier this year, many major cities in China – the U.S.’s largest supplier – went into lockdown, causing a global shipping crisis that many experts believe will continue well into the summer. Even if the current crisis subsides quickly, the level of uncertainty surrounding current global events means that many companies may be unable to depend on their traditional list of suppliers.

Of course, maintaining a long list of suppliers with whom you have cultivated relationships is an important way of creating stability for supply chains; however, as the adage goes, you should never waste a good crisis.

Although we often fall back on our existing networks and connections, the current circumstances present the perfect opportunity for you to widen your lens and find diverse suppliers that can provide new perspectives and innovation for how you produce and deliver your products.

Action 2 | Tighter Control of Inventory

In the current environment, many companies are wrestling with a combination of high inventory levels of products that aren’t selling and an inability to acquire those in high demand from customers.

One reason for this is the pandemic, which has driven a shift in customers’ spending habits, forcing many companies to reassess their high inventory levels and change the kinds of products they hold in stock.

Retailers like Target and Walmart, which are currently struggling with high inventory levels, have seen significant reductions in profits and drops in their share prices. As such, Target is planning to aggressively reduce their inventory levels, taking markdowns and canceling orders as part of their strategy to reduce supply chain delays. Although the company will likely see ‘squeezed’ profits in the coming months, the company’s CEO, Brian Cornell, expects the company to ultimately shift the company to a better position as a result of these initiatives.?

By taking advantage of the current moment to reassess your inventory levels and ensure you’re holding stock of the types of products your customers want, you can ensure you’re efficiently allocating your precious resources and shoring up your business for the challenging months (or years) ahead.

Action 3 | Add Performance-Based Incentives to Supply Contracts

Simply put, adding performance-based incentives (PBIs) to supply contracts means rewarding suppliers for their delivery and performance. PBIs are a well-recognized, efficient mechanism through which you can incentivize suppliers to deliver on time in even the most challenging of circumstances.

Remember, when in high demand and limited in their ability to deliver, suppliers are more likely to prioritize clients who are willing to reward them for their performance, making PBIs the perfect tool for helping to guarantee supply in the current business landscape.

Yet when adding PBIs to contracts, it’s important to ensure that the incentives are correctly aligned, meaning costs, risks, and rewards are equally distributed across networks.

Perhaps one of the most famous examples of a company that has used well-aligned PBIs in supply contracts to solve supply chain problems is Cisco, one of the world’s largest technology conglomerates. In 2001, a large misalignment of incentives with suppliers resulted in the company scrapping $2.5 billion in raw materials – one of the largest write-offs in U.S. history. After the write-off, the company decided to reevaluate its relationships with suppliers, realigning PBIs to ensure they were mutually beneficial for all partners across the supply chain.

Action 4 | Reserve Capacity with Key Suppliers

Research has long shown that capacity reservation contracts with suppliers can help guarantee the delivery of critical supplies in times of shortages of supply shocks. One reason for this is that capacity reservation contracts can help spread the risk between suppliers and procurers, creating greater incentives for suppliers to expand their capacity to deliver.

While not reserving capacity with suppliers can provide companies with a higher level of flexibility, a lack of commitment can create uncertainty for suppliers, meaning they will be less likely to guarantee supply in situations like the one we currently face.

As a recent report from the White House highlights, many automakers have recently started following the lead of companies like Apple to reserve capacity with semiconductor manufacturers to both guarantee supply and innovate on the dimensions that are relevant to their needs and desires.

Action 5 | Look Closer to Home and Make Rather than Buy

Prior to the pandemic, few could have imagined a situation in which companies would have to become less dependent on increasingly globalized supply chains. Yet with bottlenecks unlikely to be resolved in the near future, many companies are beginning to consider manufacturing essential supplies or sourcing them closer to home instead of buying them from abroad.

In Canada, many restaurants are turning to local suppliers in order to combat supply chain disruptions. Riley Krieger Mercer, director of Momofuku Toronto, recently told The Globe and Mail that the restaurant has been “doubling down” on sourcing from local farms in the Toronto area.

In the United States, policymakers are embarking on a strong push to increase the country’s manufacturing capacity, with the Biden Administration legislating a $250 billion fund to boost U.S. manufacturing of computer chips – a decision which has lead Samsung to announce plans to open a $17 billion chip factory in Texas to help reduce its dependency on suppliers abroad.

The Takeaway

Regardless of your industry, as a business leader, you’re likely to be affected by the changes of this new supply chain landscape. As such, we recommend asking yourself the following questions about your own company:

• Are you highly dependent on a single supplier?
• Have you had customer delivery issues driven by poor performance of your supply chain?
• If your business doubled tomorrow, could your suppliers keep up?

If you answered “yes” to any of these questions, take some time to plan out risk mitigation strategies so you can sustain your business during times of high uncertainty, because there will always be new challenges to deal with. Therefore, as business leaders, we need to build supply chain risk management plans and strategies to increase our business agility into how we run our businesses. Methods such as Sales, Inventory and Operations Planning (SIOP) or Sales & Operations Planning (S&OP) proactively help with allocating resources and optimizing assets - we share more about them in our blog post.

We have a complimentary Stakeholder Engagement Plan template just for you! With this template, you’ll learn the best practice of identifying those suppliers and putting a process in place to increase visibility of future plans for both companies so you can be proactive about implementing solutions to grow or mitigate risk together.

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