5 Steps to Build a More Resilient Commodity Strategy
Resilience, or being resilient, can be defined as something or someone with “an ability to recover from or adjust easily to misfortune or change.” The word has been thrown around in many supply chain discussions recently, but it’s tough to find a word in the English language that so concisely incorporates the core tenet of Chief Procurement Officers.
As leaders look intently at 2021 and beyond, they’ll do so with an added appreciation for the ability of their supply chains to weather storms on multiple fronts in multiple regions — to be resilient. The 2020 crises couldn’t wrap up soon enough for many of us, as the year stress tested and, in many cases, broke our most conservative downside strategy scenarios.
The vast array of modern supply challenges, particularly those from last year, demonstrated that the supply management profession requires a fundamentally different approach to ensure consistent supply. Yes, there are timeless principles like Total Cost of Ownership (TCO) that will continue long after our current headwinds have subsided, but interestingly enough it’s the application of them, often together — e.g., sole sourcing paired with extreme supply base rationalization — that has added risk to supply chains. Below are five actions you can take to build more resilient commodity strategies.
5 Steps to Build a More Resilient Commodity Strategy
1. Build Collaborative Lists
Information is only as powerful as it is available to those who can act on it. Mapping your supply base into lists by commodity, called Commodity Strategies, is a critical step toward fostering a more resilient supply chain. Commodity Strategies often include supplier market intelligence, manufacturing process capabilities, and historical company interactions that prove invaluable toward maintaining robust business and professional relationships.
Due to the strategic importance of supplier relationships, leaders are converting these historically siloed documents into the collaborative environment found in cloud software that’s available for team members, globally.
Leading organizations are continuously developing suppliers to head off supplier consolidation and capacity constraint. As a tip to efficiently increase supply base commercial competitiveness, add some “mare” suppliers, or smaller suppliers, that can nip at the heels of slower moving, often larger “thoroughbred” preferred suppliers. Outlining more granular statuses like “preferred for stamping but not for welding” and by region will elevate the organization’s ability to maintain ongoing supply.
2. Multi-Region Multi-Supplier
Global supply shocks have proven that both problems can remain isolated in one region and quickly spread around to the world. The COVID-19 pandemic is one example, but the same trend has been witnessed in a multitude of supply disruption events, from trade disputes to economic recessions.
Developing self-sufficient regional supply bases to support regional manufacturing is key to adding in structural protections. Capacity is a key consideration with a multi-region, multi-supplier approach. Securing relationships with multiple suppliers that supply parts and maintain available capacity to support their region and another region if needed can further de-risk operations.
3. Track Mutual Value Creation
The supply management profession has only taken incremental steps toward systematically creating material value for suppliers outside of sourcing parts. If we’re to be frank, we often extract more value via year-over-year cost reduction programs that damage both our organization and our suppliers’ organizations. We need to seek ways we can become a “Buyer of Choice” by co-creating enduring mutual value.
We need to find ways to create genuine value that exceeds what suppliers provide to ensure our organization can “pull” the latest technology innovations and preferred commercial terms toward our businesses.
Software technology offers quick-win, low-risk opportunities to facilitate lower-cost supplier access to the latest technologies through volume purchases that can improve suppliers’ businesses. As an example, partnering with a software provider of supply chain collaborative productivity tools can help suppliers accelerate optimization of their daily operations, from inventory reduction to packaging standardization.
4. Track Supplier Engagement
Most supplier interactions — e.g., phone calls, emails, and notes — are offline, often stored in our team’s heads and in spreadsheets, but capturing this critical supply intelligence with collaborative software tools will allow you to uncover market insights that can be utilized to optimize supply. Further, you can mine this now digital data for predictive analytics on supplier response times to spot potential supply issues sooner. Capturing this “tribal knowledge” addresses longer-term organizational risks such as ongoing workforce transitions from Generation X to Y.
5. Maintain Healthy Numbers
A supply base needs to have a healthy number of suppliers to ensure consistent supply. Many have interpreted broad supply base and focused commodity strategies as the decision between two extreme approaches: 1) higher costs with more suppliers due to lower spend leverage, or 2) lower costs with less suppliers due to higher spend leverage. In theory, the former is correct, but as with economic theory, supply-and-demand curves become inaccurate when additional information is introduced, like external market forces.
Properly valuing supply disruption risk and maintaining the right number of extra suppliers to ward off downside risk is the key to balancing risk and cost. Maintain market intelligence on alternative backup suppliers for each A-level part category you buy. At a minimum, develop commodity strategies with three to five suppliers that have an active non-disclosure agreement (NDA) on file with you, as well as detailed information on their capacity and capabilities.
Supply Base vs. Supply Base
The pace of innovation in industries like automotive and building products not only results in corporations competing against one another’s business models, but also in pitting their supply chains against each other. Seem farfetched? Maybe not so much.
In practical terms, if one supplier misses a critical part shipment it can delay a production launch, allowing your competitor to beat you to market. Substantial research has highlighted that those first to market with an innovative product tend to capture and sustain higher market share (all else being equal). Higher market share sustained over time leads to more profits, so it pays to have a resilient supply base.