A healthy supply chain is critically important to the success of any organisation. Your ability to deliver products to market on time – and without disruption – is a key driver of brand reputation, customer satisfaction and business sustainability.
But, in today’s complex business world, it isn’t always easy.
In this article we’ll walk you through 5 ways to keep your supply chain in good health.
1. Assess the health of your suppliers upfront
When designing your supply chain, the most fundamental way to minimise risk is to be highly selective in your shortlist of potential suppliers. In addition to your own research, credit reports are vital tools in supplier selection – they not only give insights into a supplier’s financial position and trading history, but often include industry benchmark information which can be helpful in ranking shortlisted suppliers.
But, whilst supplier financials are extremely important, there’s much more you need to take into account. You also need to consider:
– Where they are based and the potential risks are associated with their location
– Could they be affected by unexpected disruptions, like extreme weather, political unrest or any other “force majeure” event? How likely are these events and how damaging would they be to your business?
– Do they comply with the standards and values that are important to your business – e.g. sustainability, ethical and environmental policies?
– Do they have the capacity, and willingness, to meet demand as you grow?
The old saying ‘prevention is better than cure’ definitely applies.
2. Supply chain diversification
With increasing globalisation, the opportunity to work with suppliers in all parts of the world has increased dramatically. This enables businesses to reduce over-reliance on the limited options available in their local supply chain. Of course, expanding the scope of your supplier network introduces a number of factors that need to be carefully managed, including: quality control, delivery flexibility and logistics, currency risk, as well as legal and political risks. However, if managed properly, an expanded supplier network significantly reduces the business continuity risk associated with over-reliance on one or two key suppliers; and, competition from new suppliers introduces the opportunity to negotiate improved terms with suppliers throughout your existing supply chain.
3. Creative financing solutions
It’s not rocket science, but one of the simplest ways to ensure a healthy supply chain is to make sure your major suppliers are paid as early as possible – giving them the cash to continue fulfilling your orders without disruption.
The problem is, of course, that you have your own cash flow to be concerned with; and, paying all of your invoices early is rarely a sensible option, even for the most profitable of businesses.
Fortunately, there are a number of effective trade finance solutions that can help you pay your suppliers early, and – far from being a drain on your own working capital – actually improve your working capital position by allowing you to delay cash outflows.
Supply chain finance (also called reverse factoring) is one such solution, particularly suited to large corporate buyers. In a supply chain finance arrangement, a financial institution early pays your suppliers on behalf of your business – deducting the cost of finance from the amount paid.
You’ll then re-pay the financial institution the full invoice amount on the invoice due date, or at a later date agreed with the financial institution. Your suppliers are not only paid early, but, because the cost of finance is based on your strong credit rating (as a large corporate buyer), they also typically benefit from a lower cost of finance than is warranted by their own credit rating.
4. Find the right model for your business
There are a lot of different strategies out there for managing your supply chain – but, across the board, this seems to be a highly neglected area. Research has suggested that just 22% of companies actively design their supply chain.
Recently, there’s been a resurgence of ‘Just-In-Time’ management, which aims to cut costs by reducing the amount of product a business holds in stock. This is great, and, clearly, it can be a highly efficient and lean way of working. Of course, on the other hand, it doesn’t work for every business. It can leave you vulnerable in the event of an unexpected disruption and you may find yourself without the inventory you need to meet demand.
One alternative to Just-In-Time is MRP, or ‘Material Requirements Planning.’ This model is forward-thinking and time-phased and, while it has higher waste levels than Just-In-Time, is better suited for production processes with longer lead times.
5. Use data to sense and translate demand
We live in the age of ‘big data’ and there has never been so much information at our fingertips to help us make strategic decisions. One of the reasons supply chain health is so tricky to guarantee is that demand can be incredibly volatile and difficult to predict.
Good demand forecasting – in simple terms predicting what will happen to product sales over a given period – is vital. However, to be effective, it requires input from a range of functions within your organisation. Are you including all necessary stakeholders? The below resource provides a good primer on the subject.
It doesn’t necessarily follow that a healthy supply chain equates to a healthy business. But, a fragile, unreliable supply chain generally creates a fragile, unreliable business.
By doing your due diligence with potential suppliers before you start working with them, diversifying the suppliers you work with, looking into financial solutions like reverse factoring, choosing the right production planning strategy and using the right data to anticipate demand, you can ensure your supply chain remains healthy for the long term.