Know the Risks: Supply Chain Effectiveness: Driving Cost Management and Growth in the Consumer Industry

In this edition of “Know the Risks”, we explore the vital role of supply chain management in driving cost efficiency and growth for brands and retailers, featuring insights from Ashutosh Dekhne , #EY America’s Supply Chain and Operations Leader.

Ashutosh underscores the importance of strategic supply chain optimization for maintaining competitive advantage and capturing market opportunities. He discusses integrating supply chain data into commercial decisions to enhance service levels and reduce costs. We also delve into proactive strategies for navigating risks from global trade policies and the growing demand for sustainable and ethical sourcing.

Read our full discussion below to understand how effective supply chain management can transform challenges into strategic opportunities for consumer brands and retailers and the potential risks associated.

EY research indicates that consumer leaders view supply chain efficiency as one of their most important initiatives for business strategy. What’s the role of the supply chain in helping brands and retailers achieve their financial objectives through cost savings while also driving their growth trajectories?

Ashutosh: Cost optimization remains a fundamental focus of supply chain management. The COVID-19 pandemic highlighted the vital role of supply chains in supporting growth and capturing market opportunities. The inability to meet demand can lead to missed opportunities as consumers will seek alternatives when products are unavailable.

In a business-to-consumer (B2C) setting, supply chain operations are increasingly measured by their ability to improve metrics such as case fill rates and the timely availability of materials. Preventing stock-outs is crucial for maintaining customer satisfaction. Companies are now employing advanced simulations that integrate the supply chain with finance and commercial functions. This integration aids supply chain professionals in defining strategies that ensure on-time delivery.

The use of supply chain data in commercial decision-making is becoming widespread. Enhanced service levels contribute to revenue growth and cost reduction, while also improving working capital management. Financial leaders are keen on maximizing returns from existing assets. In manufacturing, companies are strategizing to internally produce the most profitable items using available capacity and to outsource the production of other items. This strategic alignment significantly boosts the company’s overall growth.

The current developments around fluctuating global trade policies and tariffs will significantly impact the supply chains of brands and retailers. What proactive measures can these businesses take to mitigate these risks?

Ashutosh: To mitigate these risks, businesses must proactively diversify their supply chains to reduce their dependency on regions susceptible to tariffs and develop agile strategies for rapid adaptation to changes in tariff structures. This emphasizes the importance of operational resiliency. Trade tariffs bring about increased compliance and documentation requirements, prompting supply chain professionals to depend on in-depth knowledge within their systems to ensure compliance.

The unpredictable nature of regulatory changes highlights the need for a data-centric approach to tariff classification, aimed at avoiding penalties and delays. While establishing alternative sources of supply and logistics routes may initially be costly, these expenses are justified compared to the potential costs associated with disruptive events like natural disasters or geopolitical conflicts. This proactive approach serves as a form of insurance against such risks.

Strategies for establishing a resilient supply chain model include:

• Scenario planning: Companies should develop and continually update scenarios to anticipate the effects of tariff changes and the risks arising from geopolitical dynamics. This involves crafting detailed contingency plans to quickly mitigate potential impacts.
• Scenario testing: It is crucial to periodically test these scenarios to ensure the company is prepared to act swiftly and effectively if anticipated changes materialize.
• Leveraging technology: Leveraging advanced technology is key for real-time monitoring of tariffs, automating compliance checks, and streamlining trade documentation processes to minimize errors and delays.
• Collaborating with industry associations and governments: Engaging with industry groups and governmental bodies is essential for advocating fair trade policies. This collaboration can provide decision-makers with better insights into the implications of tariff changes, enabling more informed assessments of their impact on specific industries and sectors.

By adopting these strategies, companies not only enhance their capacity to cope with the immediate challenges posed by tariff changes, but they also position themselves to capitalize on emerging opportunities. For example, companies are transitioning toward ethically sourced products, recognizing this as a growing market facilitated by customized supply chain solutions.?

EY Future Consumer Index research indicates that 42% of consumers view sustainability as “extremely important” in their purchase decision-making process. How does this increasing consumer demand for sustainability and ethical sourcing introduce both risks and opportunities within the supply chain. And with that, how do you see the evolution of regulations in this space?

Ashutosh: The procurement team’s focus on sustainability is prompting companies to assess various vulnerabilities related to suppliers. Ethical sourcing offers an opportunity to explore new supplier footprints, enhancing resiliency and ensuring that quality suppliers thrive within the ecosystem to support sustainability efforts. Supply chain solutions now enable monitoring not only of tier one and tier two suppliers, but also extend to tiers five, six and potentially even tier seven suppliers. This monitoring is expected to become mandatory in the US and European markets, necessitating swift adaptation by companies.

To adapt to ethical sourcing, companies should:

• Identify trustworthy suppliers: Before implementing any ethical supply chain strategy, it’s essential to identify trade partners who uphold similar ethical standards. For instance, assessing whether potential partners maintain sustainable working practices is crucial, particularly in industries like childcare products where trust is paramount.
• Secure trading partner relationships: After selecting suppliers, it’s important to ensure secure interactions between them and the business. Implementing appropriate identity and access management platforms becomes critical in the digital age to safeguard relationships between companies and their suppliers or customers, mitigating cyber threats effectively.
• Digitalize the supply chain: Digitalization of the supply chain helps prevent falsification of manual or paper-based documents, reducing the risk of counterfeit documents.
• Monitor shipment adherence: Monitoring adherence to shipments is vital, allowing proper tracing of materials in case of recalls.

The evolution of ethical and sustainable sourcing practices will continue, driving companies to adapt and innovate in response to changing market demands.

Given the rise of e-commerce and the constant shift in consumer buying habits, what are the key risks faced by consumer brands and retailers in managing inventory and forecasting demand? How can technology be leveraged to enhance supply chain resiliency? How do you see companies leveraging generative AI (GenAI) in understanding these behavioral changes?

Ashutosh: Consumer buying habits are in a constant state of flux, with behaviors evolving rapidly. One consistent trend is the ever-accelerating pace of change in consumer needs and behaviors compared to just a few years ago. The speed, availability and convenience of products have become increasingly crucial factors. Social media exerts a significant influence on consumer behavior, both positively and negatively. For instance, social media influencers can drive sudden surges in demand, underscoring the importance of an agile supply chain capable of addressing such spikes promptly.

Consumers now expect instant product experiences, a demand that can be met through an integrated supply chain. Integrated data products based on common data models support instantaneous and optimal responses to certain events.

Automated event response facilitated by technologies like digital twins is essential. Digital twins serve as a tool for creating and simulating supply chain scenarios within the value chain. This enables development of the entire value chain, allowing for the assessment of how changes in one part of the chain affect others.

The ability to leverage GenAI is also crucial as there’s often insufficient time to simulate scenarios comprehensively. GenAI empowers decision-makers by predicting alternative routes and simplifying decision-making processes, leading to enhanced resiliency and agility.

While there may be some skepticism surrounding the use of GenAI, companies are gradually recognizing its true potential. Unlike previous technologies like blockchain, GenAI is not capital intensive and it is user friendly. A key aspect of effectively utilizing GenAI is ensuring the accuracy of the data model and implementing a common data model across the organization. Once this foundation is established, GenAI can be democratized throughout the organization, unlocking its full value.

Consistency in analyzing input data and generating output is essential for GenAI to function effectively across the organization. By ensuring consistency, companies can maximize the benefits of GenAI and address supply chain challenges with uniformity and efficiency.

My take:

The supply chain is rising as a key and strategic function of the organization, particularly after the pandemic years. The supply chain not only plays a pivotal role in achieving financial goals by improving service levels and driving financial performance, but it also is instrumental in driving growth trajectories.

What are the risks?

Constant shifts in consumer habits, the increasing consumer demand for sustainable and ethical sourcing, and the unpredictable nature of trade policies, driven by geopolitical factors among countries and regions, contribute to the complexities of the supply chain. These frequent policy changes and uncertainties pose significant challenges for supply chain planning and risk management.

What’s the action?

Businesses must develop agile strategies to adapt to regulatory changes and mitigate associated risks, including diversifying the supply chain and leveraging technology for real-time monitoring and compliance. Furthermore, the increasing demand for sustainability and ethical sourcing presents both risks and opportunities, urging companies to identify trustworthy suppliers, secure trading partner relationships, digitalize the supply chain and monitor shipment adherence. Finally, with the rise of e-commerce and evolving consumer buying habits, companies must address key risks related to inventory management and demand forecasting while leveraging technology, such as GenAI, to enhance supply chain resiliency and understand behavioral changes effectively.

The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

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