Supply Chain Resilience Helps Companies Weather Economic Uncertainty
The COVID-19 crisis has had major impacts on businesses worldwide. The pandemic has negatively affected economies, flights and trucking fleets, which has decimated trade volumes and revenues. Within the supply chain and logistics industry, fragile connections and existing relationships have frayed quickly.
These conditions have prompted many companies to explore business models rooted in supply chain resilience. This represents a dramatic departure from the efficiency-focused models they'd fine-tuned for years. Given the realities of today's world, you may be weighing the pros and cons of a similar shift. As you consider different scenarios, allowing for the costs and other financial considerations of a revised business model is necessary.
The limitations of efficiency
As the world has grown more interconnected, companies have typically prioritized efficiency, especially in manufacturing. Overseas manufacturers usually offer significant savings over domestic suppliers. They can also help streamline transportation, which may ease concerns over lead times and potential delays in assembly and finishing processes. The efficient approach is usually beneficial for fast-moving industries with short product life cycles.
The potential problem with this model is that it's prone to breaking down when a disruption—such as the pandemic—idles production, transport and delivery systems. The Institute for Supply Management found that within the first few weeks of the COVID-19 outbreak, almost 75% of companies had already dealt with transportation-related supply chain disruptions.
Conversely, a resilient supply chain designed with redundancies can buffer your business from shocks down the line. Instead of a single source for a critical part or component, you can use multiple located in different parts of the world. And by leveraging your primary suppliers' key partners, you can maintain a much better picture of the production flow.
Should a work stoppage—due to natural or human-made causes—strike any of the businesses in the supply chain, the redundancies and knowledge allow you to modify your flow of goods on the fly to smooth out the process.
Admittedly, smoothing out a production process with supply chain resilience can be more costly. Multiple sources can reduce your ability to control expenses with any single supplier, and you'll likely need to tie up some capital with higher inventory levels. Besides, while local and regional suppliers offer closer proximity, they tend to charge more.
Other expenses inherent in a redundant business model include:
- Additional staff commitments to monitor suppliers around the clock
- Investments in mapping the supply chain back to the raw materials used in your products
- Sustained relationships with contract manufacturers
- Dedicated resources to analytics, forecasting and planning
While the upfront expenses of supply chain resilience are higher than in an efficiency model, companies can often recoup these costs through more successful long-term operations. By implementing safety valves and pivot points in your supply chain, you're better protecting your business from future stoppages in an increasingly volatile marketplace. This can translate into reducing drop-offs in revenues, profits and customer satisfaction.
Supply chain resilience thrives with effective management and oversight. Many organizations have found success with steps such as:
- Standardizing requirements for all suppliers
- Engineering common elements or platforms that can be used across product lines
- Regularly reviewing all inputs and outputs from processors and suppliers
- Proactively shifting activity in advance of potentially disruptive events
- Heightened communications between remote facilities and the home office
- Using data to detect and prevent supply chain fraud
As with all elements of your business, careful financial management is at the heart of your company's ability to adapt quickly and effectively to an ever-shifting landscape. By investing smartly in a resilient supply chain, you're equipping your business and employees with the tools and processes they need to navigate an uncertain economic environment into the future.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.