Shift from global to local

Suzy Taherian, lecturer, UC Davis Graduate School of Management, in this story originally published in Forbes said that supply chains should become less efficient. 

Supply chain disruptions are wreaking havoc with everything from supplies of toilet paper to meat. To address this issue in the post-Covid world, businesses are rapidly shifting supply chains from global to local and from efficiently lean to flexibly risk-proof.

Last year, priorities were led by profitability, followed by cash and then operational efficiency. In 2020, priorities have shuffled with cash now at the top, followed by operational efficiency and, finally, profitability. Companies are looking at more flexible operations and resilient supply chains, even if means sacrificing some profitability in the short term.

From international to domestic supplier

Scott Drozd, CEO of FCP Euro, is expecting possibly “4 to 6 months to a year delay in supply from Europe” so he’s buying more from suppliers in the U.S. FCP Euro is a midsize automotive parts retailer which sells 200,000 SKUs online and imports high quality parts from Europe with 4 to 5 containers on the water every day.  Drozd is continuing to order from Europe but also ordering products from domestic suppliers.

To build more agile supply chains, businesses shift from the stock-n-ship model to the drop-ship model. In a stock-n-ship model, the company purchases the inventory and stores it in the warehouse and ships it when they receive an order from the customer. In drop-ship model (or just-in-time), the company would buy from a distributor when customer orders and drops it directly at the customer site. Because the order has to be shipped directly from the distributor, this model favors a local supplier nearby. The margins are lower because there is a quicker turnaround and lower volumes.

Inventory buildup

During the initial response to the crisis many companies looked at reducing inventory to save cash. But as the crisis unfolded and the supply risk became more acute, many companies have opted to increase inventory to minimize stock-outs. Companies that have liquidity are finding they can negotiate attractive payment terms with suppliers who value steady stream of orders during the lean times. It’s important to be selective to avoid old or slow inventory. Drozd focuses on top 10% of SKUs that were 20% of sales with high turnover and pushing for 360-day terms with big orders with suppliers.

Reinforce vendor partnerships

During crisis, it’s important to strengthen key relationships.  For items in short supply, manufacturers will have to prioritize shipments and they’ll favor customers with preferable long-term relationships. Drozd has as a daily task to look at supply chain with 180 distributors around the world and for the top 20, he talks to them weekly. To maintain his supply chain, he needs to understand the status of their manufacturing facilities, any cash flow issues, and shipment delays.

Reexamine product mix

Consumer behavior has changed. With high unemployment, there may not be as much discretionary income. For the automotive business, that means less sale of cosmetic accessories and more maintenance parts needed to keep the vehicle running.  

Elevate the supply chain role

Where supply chain or procurement managers used to sit at the kids’ table, they now have a seat at the main table. Many companies have elevated the role to be under the chief financial officer or created a chief supply chain officer; some CEOs are even taking on the responsibility themselves.

Businesses are rethinking their supply chain to respond to post-Covid world, and it may mean making the supply chains less efficient but more resilient.

The original story appeared in Forbes. Read full story here.

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