Six Ways To Stay Ahead in the Global Supply Chain

REL logo 2We are pleased to bring you this post from Andrew Bale, Associate Principal at working capital and supply chain specialists REL Consultancy.

Previously low-cost manufacturing regions have begun to see their competitive advantage reduced on the back of increased domestic costs triggered by the increased infrastructure development associated with an influx of industry.

With the cost benefits of a global supply chain decreasing, it’s important to understand and quantify all of the financial impacts on a global network to guarantee the long-term success of the global supply chain model (and to protect your balance-sheet from adverse working capital implications along the way).

Here’s how:

1)     Identify the hidden costs

As the manufacturing base evolves, the once hidden costs of offshore manufacturing, which were previously outweighed by low domestic cost benefits, are gaining prominence. As the benefits of former low-cost destinations dwindle, the cost impacts of manufacturing inefficiencies, expedited freight, quality issues and returns become more critical.

For some industries, the solution may lie in relocating operations to new low-cost territories. However, while the financial proposition may be attractive on paper, organisations pursuing this strategy are reporting increased transportation lead times, constraints in production and carrier capacities, and laborious training and up-skilling requirements.

As such, the first step in adapting to the changing global manufacturing environment must be to identify improvement opportunities within the existing network. This will enable you to quantify all relevant cost and cash drivers across the supply chain and develop a comprehensive end-to-end global network strategy.

2)    Establish the correct KPIs and metrics

Traditional incentives and targets focused on cost reduction are increasingly being found to impact negatively on cash flow performance. Behaviours intended to reduce sourcing or transportation costs could in reality lead to inflated inventory levels, an increased risk of obsolescence and a lengthened cash conversion cycle across the organisation.

Clearly identifying and quantifying all variables ensures that a calculated total cost of ownership drives informed decision making. KPIs should be examined and cross-functional metrics implemented to prevent unintentional damage to overall financial performance.

3)    Quantify the impact of lead times on the business

Quantifying true inventory carrying costs and understanding the impact of extended lead times on balance sheet inventories is a key element in defining a global strategy.

Making sure that strategic and operational planning processes are aligned with lead-time horizons not only raises cross-functional transparency but also highlights where excess inventories and costs are generated.

4)    Increase flexibility

Tailored strategies can increase supply chain flexibility, reducing the constraints imposed by lengthened lead times. Options vary according to industry and geography but successful strategies may include engagement with customers to optimise product portfolios or involving suppliers in initiatives to delay product differentiation, including standardisation or postponement strategies.

5)    Plan for all contingencies

Global supply chains are particularly susceptible to local cultural, geographical and political events. Implementing proactive scenario planning and risk assessment processes with a balanced assessment of the financial impacts mitigates global supply risks while reducing short-term impacts on cost and cash flow.

6)    Engage with suppliers to reduce the cash conversion cycle

Low-cost suppliers have limited ability to accept significant term extensions or price reductions, but including them in the process could lead to mutually beneficial initiatives being identified. For example, calculating and negotiating the trade-off between unit cost and batch size would reduce average inventory levels, increasing flexibility.

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