If you attended the 2024 ISM-Houston Supplier Expo as we did earlier this month, you know that supply chain optimization is on everyone’s radar right now. Specifically, the dual challenges of cost and risk. Managing these two is like trying to stay level on a balance beam. When you tackle costs, those gains can be offset by too much risk. On any given day, we need to ask ourselves, “What’s happening right now, and what can I do to stay on track?” Depending on the circumstance, you may need to focus more on risk and then other times on cost drivers. So how do you achieve optimal balance? We look for opportunities in the challenges.
Transportation and lead times
Coming out of Covid, supply chains were in complete disarray because we relied so much on China and other countries for our manufacturing materials. Strikes at ports kept supplies out on the water for months. Today we have ships stalled in the Middle East due to attacks and hijackings. Water levels have been so low in the Panama Canal that ships couldn’t pass, taking an extra 13 days to reroute materials around South America. When you understand where and why things are happening and how they’re going to impact your inventory, you can make moves to get ahead of it. Adjust and coordinate closely with facilities to prepare for longer delivery schedules.
Another solution is to onshore supplies and bring materials closer to home. We’re seeing major shifts taking place for onshoring. Federal, state, and local governments are creating huge incentives to build manufacturing facilities in the U.S. The White House reported that semiconductor manufacturing jobs increased by 4.3% year-over-year due to federal CHIPS and Science Act funding incentives. Nearshoring to reduce travel distances or relocating manufacturing to more “politically-friendly” countries are also viable options. Whichever direction you pursue, you’ll benefit from quicker order-to-receipt times and lower costs.
Inflation
Looking back on inflation over the past four years, something that sold for $1 in 2020 now costs $1.20. So, even if you negotiated contracts just three years ago, you need to revisit them now. Take a look at what you’re spending across the board and map out the impact. Even if it’s not time to renegotiate a contract, at least begin a dialogue to shape your agreement to fit current market conditions. We firmly believe that cost containment works best in the spirit of fair and reasonable partnership, and that you can improve supplier relationships while lowering costs. Typically, no one wins if a supplier goes out of business, so even when dealing with large corporations, it’s in everyone’s best interest to land in that “fair and reasonable” territory. And make sure billing is aligned with what’s in your contracts. Contract compliance audits will recover dollars and contain your future spending. According to CAPS Research, 84% of CEOs see a high risk of recession in the next 12 months. How does that impact your procure-to-pay decisions today?
Risk
Whether geopolitical or operational, risk is inherent in the supply chain. We’ve found that although taking a more targeted view of the contract as a risk management tool is effective, it’s too often overlooked as a tactic. A balanced risk model is the way to go, where neither the client nor the supplier carries an excessive burden of risk. When negotiating to hit this sweet spot, it’s helpful to break it down into six factors: financial risk, operational risk, HS&E risk, litigation risk, business process risk, and audit recovery risk. Make the most of contract negotiations. Fine-tune contract language to eliminate broad interpretations and clearly outline each party’s responsibilities.
ESG
Net zero, climate sustainability, diversity, regulations… the needle on ESG reporting requirements is already moving, and it’s not going to slow down. Eventually, you’re going to need an entire program, much like SOX, to handle the burden of regulatory reporting and controls. It goes back to risk. From Level 1 to Level 3 suppliers and beyond, what’s your visibility into their businesses, practices, and impact? It’s going to matter. At the very least, a program to address Level 1 risk should be developed. You’re going to be hearing more about this in the coming months. If you’re global, you’re already under heightened scrutiny from European markets, so consider how to best manage the exponential increase in ESG burdens headed your way.
In summary, these steps can help when tackling your cost and risk challenges:
- Consider different approaches to transportation.
- Renegotiate your contracts to manage inflation.
- Conduct contract compliance reviews to recover dollars.
- Leverage your contracts as a risk mitigation tool.
- Prepare for the ESG avalanche that’s headed your way.
We help companies compete more effectively by tightly focusing on improved profitability while reducing risk. If you’re interested in talking about ways to optimize your supply chain, let’s get started.