Why CFO’s Should Prioritize Supply Chain Resilience
~ Latest from Oracle NetSuite
CFO Leadership Council is proud to align with Oracle NetSuite as a national partner. Ian McCue, Content Manager, NetSuite, gives the latest insight on supply chain management and why it should be an action item in 2021.
When companies first started relying on overseas suppliers and manufacturers 30 years ago, it seemed like a no-brainer: dramatically lower costs for comparable quality and reliability. Sure, this move added some complexities, but nothing that would outweigh a major boost to the bottom line.
Over time, U.S. companies took more pieces of their supply chains offshore, and domestic resources for sourcing and manufacturing started to dry up. At the same time, entire micro-economies dedicated to certain industries sprung up and thrived abroad, primarily in Asia. It was never easier for new brands to find everything they needed to develop and make whatever products they dreamed up.
Lost or ignored in this dramatic shift were the risks posed by a supply chain that leaned so heavily on partners thousands of miles away. Tariffs on Chinese imports that began in 2018 first exposed potential issues, especially as they became steeper and more wide-ranging the next year. But the true reckoning came in 2020, as COVID-19 caused widespread shutdowns, including in China — the world’s largest exporter — when it hit that country hard near the beginning of the year and unearthed the problems of a convoluted, faraway logistics network
CFOs may not hold primary responsibility for resolving these operational shortfalls and identifying ways to increase supply chain diversity. However, they’re certainly invested in avoiding similar situations that lead to lost revenue and understanding the expenses that come with building supply chain resilience.
Lessons Learned from COVID-19
The pandemic revealed the vulnerabilities of supply chains built around lowering costs without real consideration for the risks this approach introduced. When COVID-19 brought delays, they immediately impacted companies with networks that, at some stage,relied ona single supplier or manufacturer — or even multiple partners in the same region. Consider that in March, manufacturing capacity in China was only 53% of normal levels and 57% in Mexico, according to a survey by the Institute for Supply Management. By May, a striking 97% of businesses reported their supply chains had been or would be affected by the pandemic. Companies lacked sufficient contingency plans to keep their value chains functional during an event of this size and scale, and CFOs watched missed sales, backorders and late deliveries pile up.
So it comes as no surprise that executives are now focused on creating a more diverse, flexible supply chain that will fare better during the next major disruption. A Capgemini report from this Fall says strengthening the supply chain is a top priority for 62% of organizations, and 55% of supply chain leaders believe they will have a highly resilient supply chain within three years (just 21% think they have that today), per Gartner.
Leaders recognize not only the importance of this effort, but the required work and costs. Two-thirds acknowledge strengthening their supply chains will require major changes, and 27% are willing to increase costs in pursuit of this goal, according to Capgemini.
Knowing your business needs investment and actually executing are two different things. As a CFO looking to bring your colleagues along, make the case that you can answer with some degree of confidence: What will normal look like for us in 2021?
How? We believe that finance departments need to make permanent their new approach to FP&A, and not because we think conditions for businesses of all stripes are likely to change on a monthly basis, as they have been. Rather, our data shows that continuous, in-depth and data-driven FP&A is something that other business leaders wanted in 2019, particularly as it relates to evaluating new strategic investments. It was finance leaders who shied away — especially in larger organizations. The chart below shows that as companies get bigger, finance leaders are less intent on finding and, presumably, evaluating growth opportunities, as part of FP&A.
It appears that as companies grow, and matters of finance and accounting get more complex, simply doing the job right becomes all consuming. So, finance leaders abdicate their role in finding strategic investments.
How to Build Resilience
Standing up a supply chain that can quickly adapt to and recover from the unexpected is no small task, but it boils down to securing additional partners and sharing data on the journey of a product from raw material to finished good. Here are four actions companies can take now to improve their supply chains :
- Start multi-sourcing: It’s smart to establish redundancies, or multiple partners that can supply the same materials or items, for any key components or goods. This allows companies to quickly shift work to an alternative supplier or manufacturer when one has to reduce capacity or shut down. Multi-sourcing prevents a single point of failure from derailing this carefully coordinated network.While businesses may have “primary” and “secondary” suppliers, they need to consistently use all of them — not only in a moment of crisis. Ensure you’re procuring goods and staying in regular communication with all suppliers, even if a handful of them receive the bulk of your orders.
- Prioritize geographic diversity: Just as critical as finding multiple partners for different materials, components and products is geographic diversity. If three suppliers for you best-selling line of items are all in Southeast Asia or Europe, that can defeat the purpose of redundancies. Natural disasters, political instability and disease outbreaks often affect only a certain country or region, and any of these events could knock out all of your suppliers. When possible, select key partners spread across the globe. It’s worth investigating whether any of your existing partners have other locations capable of providing crucial supplies or items, as this can be faster and easier than finding and vetting organizations you’ve never worked with before. However, as businesses eye diversity, CFOs should evaluate the impact of any tariffs, special taxes and potential political instability and natural disasters that come with operating in these countries.
- Evaluate onshoring and nearshoring: As part of building supply chain diversity, a business might seek suppliers, manufacturers or distributors closer to home. This idea first gained traction when tariffs as high as 25% ate into corporate profits. For U.S.-based firms, that could mean shifting work to North American suppliers and manufacturers, whether in the states, Mexico or Canada. There are a host of benefits that come with local partners, including shorter lead times, lower transportation costs, greater transparency and avoidance of tariffs and taxes that some overseas imports bring. CFOs should know that finding suppliers with the required production capacity and labor pool in another region could be a challenge and, depending on the country, labor and production costs may be higher. But some will determine it’s a worthy tradeoff, and at the very least, it’s an option worth exploring.
- Enable greater transparency: As COVID-19 spread, many companies realized they could not identify the original source of their materials, parts and goods, nor see the status of outstanding orders in real time. They could identify their Tier 1 suppliers, but were less clear about Tier 2 and Tier 3 suppliers that they may not work with directly. This ability to track every item down to its point of origin helps organizations gauge the potential effects of a disruption. Could this event prevent a Tier 2 manufacturer from operating at full capacity, and if so, how might that affect your ability to stock certain items? What is the potential financial impact of that? Mapping out your extended supplier network can help you recognize and prepare for possible problems, giving your team more time to redirect orders to another supplier or increase safety stock. There are both human and technological components here: supply chain managers should check in with partners frequently, especially during uncertain times, and use systems to monitor the status of partners and orders. About 65% of companies plan to increase data sharing in response to the pandemic, according to Capgemini, and today’s supply chain applications make this possible.
Choosing the Right Partners
Should executives decide their business needs to diversify, they should know that finding and onboarding new supply chain partners could be a relatively lengthy and time-consuming process. So the sooner you can get started, the better.
Here are five basic steps companies usually take to launch new partnerships:
- Identify the locations for a supplier or manufacturer that make the most sense for your business based on cost, available resources and proximity to your facilities.
- Once you have a list of candidates, ask them about production capacity and lead times, then gather detailed quotes from the remaining contenders.
- Use those quotes to calculate the landed cost and compare it to that of your current partners. If it’s within the acceptable range, request samples and customer references.
- Evaluate and test samples to make sure they meet your requirements and quality standards.
- Negotiate and finalize the pricing and contract terms, establishing a clear date for when this partner will ship its first orders to your facility.
- Update inventory and order management systems with any new SKUs to distinguish them from similar items from other suppliers.
A Strategic Investment
CFOs are not blind to the fact that the changes required to bolster their supply chain will bring additional expenses, and they may be hesitant to make such investments at a time when many have seen profit dip. But they should realize that adjusting now will prove its value soon enough. Businesses that are able to keep operations humming while others flounder during future disruptions, big or small, will see a rapid return on the initial costs of this initiative.
For more than 20 years, Oracle NetSuite has helped organizations grow, scale and adapt to change. NetSuite provides a suite of cloud-based applications, which includes financials / Enterprise Resource Planning (ERP), inventory management, HR, professional services automation and omnichannel commerce, used by more than 24,000 customers in 203 countries and dependent territories.
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