Inflation and Risk Have Executives Rethinking Supply Chain Strategy

Manufacturers have survived the worst two years in global supply chain history, and the situation continues to grow more complex.

Between inflation and increased risk of disruption, companies are making short-term sacrifices while actively exploring fundamental changes to their sourcing strategies. Some companies are finding success in the near-term by expanding relationships with alternative suppliers, increasing communication across the supply chain, and reshaping demand through potential configuration changes even as they consider how to best "risk-proof" their supply base for the long term.

Several times each year, TBM brings together a group of middle market manufacturing and service sector executives from major companies in a variety of industries for a virtual roundtable discussion. The forum provides a platform for sharing ideas and successful approaches to tackle the highest priority industry challenges. In March, participants focused on inflation and supply chain risk. Operations executives discusses best practises for successfully managing increasing costs and diversifying their supply chains.

Below is an overview of ideas shared between the manufacturing and service-sector business leaders who joined our Operations Executive Roundtable:

Absorb increasing material costs in the short term to open the door to significant long term gains.

• As inflationary pressures continue to drive prices up, passing them along to customers can be difficult or even impossible due to long-term contracts.
• Strategically, it may make sense for your business to take the price hit for now, especially if your customers have other options or if direct competitors are actively raising their prices.
• Reducing costs in other areas can help you manage and offset the price increases. Some manufacturers are reducing shipping costs by repacking trucks to accommodate more product or by taking advantage of shipping cohorts.
• In the long-term, retaining customers and sales can make up for these short-term losses.
• By following this strategy, one manufacturer endured several months of negative EBITDA, but ultimately gained significant market share and has since logged record new sales growth that will begin to yield economies of scale.

Use design changes and demand shaping to steer customers toward solutions that are more affordable for you to produce.

• Consider where you can swap materials or processes to take advantage of more available and affordable materials and components, such as switching from injection-moulded to thermoform-moulded parts.
• Nudge customers toward the more affordable choices or less configured products by offering pricing and lead time incentives.
• Some companies are hiring engineers to expedite design and configuration changes and to conduct the functional testing processes required to validate these types of changes.
• Be transparent and candid with customers about the reasons for the alternatives you are suggesting, and clearly lay out the trade-offs involved.
• Some manufacturers are embracing a "take it or leave it" approach when presenting their customers with alternative design and configuration options.

Reduce supply chain risk by regionalising your supply chain.

• Ongoing and emerging geopolitical crises have most manufacturers thinking through how to move production closer to where products are ultimately needed.
• Conversations around nearshoring, onshoring, or even bringing production in house are underway as companies look for ways to reduce dependence on overseas suppliers and China in particular.
• Often, manufacturers are finding that nearshoring and onshoring not only reduce risk, but can be cost-effective when the total "landed cost" of components is considered.
• Labour challenges are a deterrent to onshoring or insourcing, but companies are looking at new ways to overcome these obstacles, including investing in more automation.

Build supply chain diversity and balance into the long-term strategy to further mitigate risk.

• Maintaining diversity and balance will be essential to preventing future supply problems.
• Manufacturers are looking at dual sourcing strategies to create redundancy within their supply chains.
• Some operations executives are considering balancing distribution sourcing with direct manufacturing to increase options for securing needed supplies.

Make supply chain solutions a top priority.

Operations executives and their teams are busier than ever dealing with day-to-day supply chain challenges. This can leave little time for exploring longer-term, strategic fixes, especially when most of those fixes come with a new set of challenges to address. Leaders who are finding the time to strategize, or those who tap consultants or other resources to help, are starting to see more wins, more often.

While major strategy shifts take time to execute, taking the first steps and consistently working toward long-term goals is critical to future-proofing your supply chain. TBM will continue to support your efforts by sharing insights from our own work helping companies build the diverse, balanced, and resilient supply chains they need to succeed.