How Your Business Strategy Is Influenced By Your Supply Chain

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Business strategy is tacitly linked and strongly influenced by the supply chain. From global supply networks, delivery streams, through to performance management and instability. The supply chain can be a key constraint in how businesses targets growth and product development.

Most business strategies will consist of goal and policy setting. Typically goals will relate to products and strategies targeted toward gaining market share and increasing customer value both of which requiring increasing levels of competitiveness and agility.

Whilst strategy has a significant part to play in setting the requirements and objectives on business functions the instability of the supply chain can act as a significant constraint (or accelerator) setting the speed at which the business moves and reacts.

Instability, often associated with supply chains, and business strategy are not commonly seen as being easily combined. For example, strategies targeting business growth may be a key part of the business strategy, but business growth will be difficult if the supply chain is constrained by capacity or the supplier network (let alone obsolescence or broader commodity issues).

Once a strategy has been defined careful management will be required to reach objectives ensuring that issues in terms of cost, quality and delivery are kept to a minimum. Objectives may well necessitate change – be this at a supplier level (e.g. lower costs) or at a sourcing level (for new products) or within the broader logistics channels to target reducing lead times to the customer. Many manufacturing organization’s business strategies are tightly coupled with commodity markets. For example, when wheat rises by 45% in only a very short time, then the business strategy of a pasta making firm is almost as directly affected than that company’s supply chain.

With broadening compliancy and environmental policies many business strategies include responsibility targets which while are not exactly attuned to the physical product may well require re-configuration of the material flow.

The close interdependence of the business strategy and supply chain needs to be openly acknowledged, so that the two can be viewed in the context of how they affect each other. There are a myriad of different ways in which the supply chain and business strategy are closely intertwined and if a company thinks that the supply chain and the business strategy are independent from each other, then this can severely hamper the implementation of any plans that are established or goals that are set.

Forecasting long term procurement spend

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One of the common challenges many businesses face is how to cost long term projects. Typically these projects will see materials procured over a number of years with the pressure that the project must meet a forecasted profit target therefore relying on costs to be maintained to an acceptable level.

Long term projects such as these are commonplace. Tenders or bids are often the start point for many, this is often where cost targets become established. This requirement to maintain costs can be commonly characterised for any product that has a lengthy life cycle/life span – this may be as a result of lengthy development and then production/ manufacturing periods (for example in the aerospace sector) or in FMCG where volumes of product will be manufactured during the life span of the product. Whatever their origins – for long term projects/programmes, costs frequently have to be maintained or increasingly improved upon to maintain competiveness.

Once a long term cost model has been established the challenge to maintain it often falls to the strategic procurement team to devise a strategy that can deliver the required materials at the right price during the lifecycle of the product. This will usually require analysis of a significant bill of materials and the creation of a plan that can meet the objective. Understanding the view of the long term cost requirement is often the facilitator for supply chain strategy – for example planning a project over 10 years can see where squeezes on margins occur which can intern drive changes in the supply chain to recover profit levels.

There is a fine balance in defining how much of the long term costing is based on fact (backed up by supplier quotations and/or contracts) and how much is based on pure forecast . Forecasting is an inherently risky process, its crystal ball gazing and you wont capture all of the challenges/risks inherent within a 5-10-15 years project. Near term planning will undoubtedly be more accurate than long term planning. But both will improve with closer dialogue with the relevant suppliers and more detailed understanding of the commodities that will be procured.

What can influence material cost over the medium to long term?

Whilst this isn’t an exhaustive list – materials can be exposed to any number of variables that can influence both their price and availability over the long term – these include:

• Effects of Annual Escalation/Inflation
• Supply and Demand rates within the market
• Labour rates
• Obsolescence issues
• Currency fluctuations
• Innovation and Efficiency Gains

Strategy

Given these challenges coupled with a need to accurately predict long term costs what strategies can be employed? Here are two common methods

Contracts and Long term agreements

One of the most common methods for long term business models is to utilize long term agreements with suppliers that dictate what costs will apply during the contract term – this can articulate the likely cost during the duration of the contract coupled with the inclusion of any commercial requirements which help alleviate risk to the buying organization.

LTA’s can be a double edged sword – its very probable that commodity markets will see pricing fluctuation over a number of years and this move can be downwards as well as up – if an LTA fails to describe what will happen in such events where costs improve then the opportunity for savings can be missed. LTA’s can be fraught when agreeing costs so it’s imperative that the relationship with the supplier is developed and that the agreement can be as mutually supportive as possible (its no good having an agreement that potentially forces your supplier out of business!)

Strategic Stock holding

For commodities that may see wide cost variation or be susceptible to obsolescence one option to mitigate price rises is to procure long term stock holdings – clearly this requires careful thought and a suitable business case as it can require substantial expenditure at an early stage where revenues may not yet be guaranteed. Many organizations will look to their supply chain to use such methods (keeping their own stock holding to a minimum but passing the responsibility onto its suppliers).

Don’t forget cost reduction opportunities

Most businesses will have initiatives that will attempt to deliver material savings to the businesses and any long term costing should consider these projects together with point of embodiment – this is especially true as development activities move into their production phase and opportunities such as greater buying volumes (and therefore leverage) or manufacturing improvements/efficiencies become relevant.

Long term plans are plans!

One risk is that forecasts can present an unreal expectation of what can be achieved and result in costs being accepted that cannot actually be achieved resulting in poor profitability and distrust o f procurement. Things will happen – its unrealistic to expect that issues will not occur – however getting a view of long term pricing can provide a unique view point into the challenges that could affect the business and help devise a procurement strategy that not only delivers material but delivers it to cost as well.

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