Pathway to Profit - May 2023 #125

Supply Chain Future

The role of bottlenecks and the fact that supply chains are a system of systems

The Wall Street Journal announced in an article in December that supply chains upended during COVID are now back to normal. While some elements of the supply chain, like the availability and cost of freight containers, have settled, so many contributing factors to disruptions remain that any comfort gained from the idea things are ‘back to normal’ is, in my humble opinion, very premature.

The war in Ukraine continues; China’s threatening approach to Taiwan and others in the Pacific remains, and the political relationship between the USA and China is not as friendly as it could - or needs - to be. Any business with China as a key supplier is still at a high risk of further disruption. This risk needs to be addressed.

Also, ask any business and they will tell you good, high-quality staff are still very hard to find – and even when you do find them, the demand for their services makes them expensive. There is a significant risk they will not stay, often lured away by only a few dollars more. I have one client who has been actively recruiting from overseas and, thanks to the recent opening of the borders and the relaxing immigration requirements, has been able to meet some of their requirements from overseas.

COVID drove many executives to secure whatever raw materials they could find when they were available. Those executives are now dealing with the consequences of that: too much inventory. I have labelled this phenomenon “Comfort Inventory”. Not being “caught short” was the comfort they gained by having this inventory, believing it would enable them to continue production or supply to customers because it was physically located on their premises.?

However, a ‘buy what you can when you can’ inventory management strategy is a poor one, and any company employing it finds its balance sheet is bloated with inventory. However, they are still experiencing shortages of other items. That’s the classic inventory conundrum:?too much of the wrong stuff and not enough of the right stuff.?

All of this highlights the interconnectedness of different supply chain systems and that executives must remain vigilant: volatility and uncertainty are ever present for businesses, as has always been the case. Whilst, as the article alluded to, this may be ‘back to normal’, the challenge has not been defeated.

If you are experiencing these issues, then I suggest you look at which of the following responses might work for you:

• Review the suppliers of your key raw materials. If they or your suppliers' suppler are reliant on China, start to take steps to identify alternatives and progressively move away from them.
• Look for ways to re-shore, near-shore or at least friendly-shore your supply base. This may require you to invest in automation within your production facilities to control those parts of your production without sacrificing the low labour cost you currently have.
• Introduce or refine your S&OP processes. Are you measuring the accuracy of your forecasts? If not, start. Do you clearly understand your production capacity and utilisation rates?by machine?
• When did you last undertake an audit of your Bills of Material and/or Bills of Operation? If it has been over 12 months, this may be contributing to your inventory management challenges.
• Are you making the best use of technology? Are you using real-time data capture in your operations, like on the production floor and in your warehouse operations? Are you utilising your ERP system to its fullest capacity? The number of ERP restoration projects we have been undertaking recently has increased significantly. Perhaps you have this issue too.
• Do you know which customers are profitable and which ones are not? Many don’t. This is why our supply chain audit services are becoming popular lately; we help identify and rectify that.
• Re-examine your capital utilisation. Many are finding their cash is being poorly utilised - again, something the supply chain audit helps to rectify.

In volatile times such as we are experiencing now, rather than looking for the next big thing to fix your challenges or propel you into your next phase of growth, look to ensure you have a bullet proof foundation upon which to grow. Make sure your ‘business 101’ activities are working as they should.?

Sound inventory management practices, use of S&OP, MRP and cash flow management are critical to allowing you to build solid growth momentum. Without your business 101 activities in place, growth will quickly be followed by out-of-control speed wobbles. And we all know what happens when you drive too fast and get the speed wobbles.

If you would like an independent review of whether your business 101 activities are as solid as they need to be, reach out for a confidential chat or book a virtual coffee.

Until next time...

Sincerely,

David