27 June 2014 | Guy Cabeke
The influx of industry to low-cost sourcing destinations has brought about infrastructure development in those countries, increasing living expenses and wage expectations.
Previously low-cost manufacturing regions have begun to see their competitive advantage reduced as their domestic costs begin to rise. So, with the cost benefits of a global supply chain reducing, it’s important to understand and quantify all financial impacts on a global network to guarantee the long-term success of this model (and protect the balance sheet from adverse working capital implications along the way). Here are my tips:
• Identify the hidden costs of a global supply chain. As the manufacturing base evolves, the previously hidden costs of offshore manufacturing, once outweighed by the significant benefits, are gaining importance in cost-benefit decision making. The cost impacts of manufacturing inefficiencies, expedited freight, quality issues and returns become more critical. For some industries, the solution may lie in relocating operations, following low-cost new territories as they emerge. But while on paper the costs may be attractive, organisations pursuing this strategy are reporting increased transportation lead times, constraints on production and carrier capacities, and training and up-skilling requirements. As such, a first step in adapting to the changing global manufacturing environment must be to identify improvement opportunities in the existing network, to quantify all relevant cost and cash drivers across the supply chain and develop a comprehensive end-to-end global network strategy.
• Establish the correct KPIs and metrics. Traditional incentives and targets focused on cost reduction are increasingly being found to significantly impact cash flow performance. Behaviours intended to reduce sourcing or transportation costs may do so at the expense of inflated inventory levels, an increased risk of obsolescence and a lengthened cash conversion cycle across the organisation. Clearly identifying and quantifying all variables ensures that a calculated total cost of ownership drives informed decision-making. KPIs should be examined and cross-functional metrics implemented to prevent unintentional damage to overall financial performance.
• Quantify the impact of lead times on the business. Quantifying true inventory carrying costs and understanding the impact of extended lead times on balance sheet inventories is a key element in the process of defining a global strategy. Ensuring strategic and operational planning processes are aligned with lead-time horizons not only raises cross-functional transparency but also focuses attention on the points where excess inventories and costs are generated.
• Increase flexibility. Tailored strategies can be identified and modelled to increase supply chain flexibility, reducing the constraints imposed by lengthened lead times. Naturally, options vary according to industry and geography but successful strategies may include engagement with customers to optimise product portfolios or involving suppliers in initiatives to delay product differentiation, including standardisation or postponement strategies.
• Plan for all contingencies. Global supply chains are particularly susceptible to local cultural, geographical and political events. Implementing proactive scenario planning and risk assessment processes with a balanced assessment of the financial impacts mitigates global supply risks while reducing short-term impacts on cost and cash flow.
• Engage with suppliers to reduce the cash conversion cycle. Low-cost suppliers have limited ability to accept significant terms extensions or price reductions, but including them in the process can identify and produce agreement on mutually beneficial initiatives. For example, calculating and negotiating the trade-off between unit cost and batch size would reduce average inventory levels, increasing flexibility.
☛ Guy Cabeke is associate principal at working capital and supply chain specialist REL Consultancy