In today’s highly globalized economy, no country can remain isolated or insulated from the outside world. In 2017, the US’s international trade was worth $5.2 trillion – with exports accounting for $2.3 trillion and imports at $2.9 trillion. Which means the US is a net importer, which imports 56% goods & services, against 44% exports of the total international trade. Except for the Food and Beverage market, the US is a net-importer for all other trade relations which include Capital Goods, Consumer Goods, Industrial Goods, Automotive, etc. These 10 countries account for nearly 70% of international trade imports of US-China, Mexico, Canada, Japan, Germany, South Korea, UK, Ireland, India, and Italy.
As a result, many US businesses are affected by many international factors beyond their control. Factors include (but are not limited to) – geopolitical tensions, terrorist attacks, natural disasters, epidemics, volatility in fuel prices and foreign exchange, logistics, international tariffs, trade agreements, and sanctions. These are apart from the regular trade risks like – global market scenario and changing customer preferences, technological risks, supplier performance, and foreign competitors.
And for your business, it boils down to this – How do you manage and mitigate risks to your Supply Chain during uncertain and uncontrollable external environment? While there is no one-size-fits-all approach to this complex challenge, our guide discusses 10 key elements that will help you evaluate your existing Supply Chain and help you in adjusting your Supply Chain strategies.
1. Diversification of Supplier Base
With many US businesses depending more on the import of goods, and with rising geopolitical tensions, it’s important for your procurement team to revisit your medium to long-term purchasing strategies. Over-dependence on a single country or a region for your raw material supplies presents a risky proposition and needs to be reconsidered. In such cases, purchasers need to be actively and strategically on the lookout for Suppliers based in different countries and different geographical regions.
At times, this can be a daunting task for your Purchase Team, and they can apply the Pareto’s principle of “Vital few and trivial many”. Here, they can define the starting point of restructuring your Supplier base by first concentrating on the major items being purchased in terms of value and volume. Once they have covered the “A class” items, they can move on to “B class” items and finally if required for “C class” items.
2. Strategic Make-or-Buy Consideration
Apart from your regular Business Review meetings, special consideration needs to be given to your Manufacturing strategy in terms of make-vs.-buy and buy-vs.-make. Carefully review your entire portfolio of inventory being handled – Raw material, Sub-assemblies, Work-in-Progress (WIP) and Finished Goods. What are your core competencies and value addition being carried out in your Manufacturing Plant? Are there strategic raw material that can be manufactured in-house or within the US rather than importing? Are there less value-added, or non-core competency Sub-assemblies or Finished Goods that can be outsourced to other companies or regions? This topic itself is highly complex and needs a cross-functional team to work on a short-term project basis. However, once completed, the benefits of this exercise far outweigh the investments made in terms of resources and personnel.
3. Landing Price perspective for Imports
While experienced Purchasers keep an eye on the Landing Price of the goods being imported, it’s always beneficial to regularly review and analyze the Landing Price in a structured manner. Landing Price of imported goods include (but not limited to) – Actual unit purchasing price, Local Tariffs, International Logistics Costs, Carrying & Forwarding, Administrative Costs, etc.
While some components of the Landing Price are beyond control, a combination of the Actual unit purchasing price + International Logistics Costs is where the hidden gold lies! Can the raw material be procured from a nearby country or from a country with more favorable Logistics cost? Can the raw material planning be done in advance to increase the Logistics mode options? While all these options are being considered, always keep an eye on your objective of “Diversification of the Supplier Base.”
4. The Power of Kaizen – Continuous Improvement
Never underestimate the power of small incremental positive changes in your Business Processes and Working Environment. While major breakthroughs and inventions come once in a while, it’s the power of Kaizen – Continuous Improvement that yields great results consistently and sustainably. It’s a great idea to launch a formal Kaizen Program in your company whereby all Kaizens are encouraged and appreciated. Train and guide your employees to document and quantify their Kaizen initiatives. Recognizing and rewarding the high impact Kaizens is a great way to keep your employees engaged and motivated.
5. Value Engineering
Value is defined as the ratio of function to cost of the product or service. Value Engineering is a function-oriented, systematic team approach and study of the “value” of products and services from the end-user perspective. Hence, value to the customer can be manipulated by either improving the function or reducing the cost. Focus on Value Engineering by your Design and Manufacturing Teams can provide a competitive edge against your competitors. The secret lies in identifying cheaper substitutes and alternatives that have equal or better performance. Formal workshops involving cross-functional teams primarily from Design, Manufacturing, Engineering, and Marketing can be very effective for such cost reduction initiatives of your company.
6. Explore Standardization & Rationalization
A very simple yet often overlooked technique for cost reduction is Standardization. Standardization is primarily used for reduction in a variety of raw material components and spares. Lesser variety means less complexity, more purchasing power, lesser storage space requirements, reduction in lead times, lower risk of obsolescence and reduction in working capital requirements. Cross-function team involving Stores, Purchase, Maintenance, Design, and Manufacturing can effectively lead your company’s standardization exercise.
Also, review the total number of active SKUs of Raw Material (RM) and Finished Goods of your business. The larger number of SKUs, represent more complexity, more working capital requirement and compromise on economies of scale. Can the additional findings of your standardization exercise be used to further reduce the RM SKUs? Based on the inputs from your Field Sales & Marketing Teams, are certain active Finished Goods (FG) SKUs potential candidates for discontinuation?
7. Market Base Expansion
Is your business selling only to a limited region or few countries? Is your business serving a limited customer base? What changes in your existing products or new product offering needs to be considered for expanding your sales outreach? Remember, don’t keep all your eggs in one basket, but rather diversify – this strategy is one of the best hedging against International Business Risks. Experienced Marketers and Business Managers know this strategy very well and might just be waiting for the Management directives and Budget approval for expansion. New sales regions can be capital intensive and also might require set-up of a totally new distribution network and marketing strategy.
8. Explore Flexible Manufacturing
Flexible Manufacturing System (FMS)is best suited for medium variety and medium production volume items. FMS provides unmatched advantages like increased capacity utilization, increased flexibility, reduction in WIP and FG inventory levels, lower production lead time, lesser changeover time and higher productivity. But here, let’s not limit the concept of Flexible Manufacturing to only the Manufacturing capacity and flexibility, but also broaden our horizon to Finished Goods. Why not think of producing Base variants of Finished Goods which can be manufactured at different manufacturing facilities and can be further modified and customized depending on the regional market requirements? Even though FMS is initially capital intensive, it can provide a definitive competitive edge to your business.
9. Unlock the Hidden Potential
Pay attention to your Slow and Non-moving Inventories. Hidden underneath these inventories are the potential of cash generation, space generation and much needed de-cluttering exercise for your business. A regular watch and action on inventory age reports are required. Slow-moving and non-moving finished goods can be liquidated through discounts and fire-sale. These inventories might require re-packaging or re-furbishing and a specific advertisement and liquidation channel, but the results are rewarding.
10. Build a Flexible & Dynamic Supply Chain Team
Employees are the greatest assets of any organization and it’s always great to have a flexible and dynamic Supply Chain team. Seamless communication & reporting tools and easy access to technological resources result in high-quality quick decisions. Such an agile team can swiftly respond to business urgencies and quickly tap on potential opportunities. Hence, focus on individual employee development and plan for cross-functional exposure. Small cross-functional groups, working on specific Supply Chain improvement projects, provide great results through empowerment.