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Could Looming Supply Chain Risks Sink Your Company?

Efficiency gains create a first-level shield against rising costs and the fallout from a trade war.

Supply chains are suddenly under threat. Following years of low inflation and stable trade relations, executive teams in boardrooms across the globe are now grappling with rising inflation, a rapidly changing trade environment and the dire threat of an all-out trade war. Already, pressure is up sharply on earnings, and many leaders fear that traditional cost-saving measures may no longer be enough to avoid a heavy hit.

It’s easy—and understandable—to feel powerless and to continue doing business as usual until the trouble becomes acute. But some fast movers have begun taking important steps to improve their agility and reduce their exposure to supply risk. How? Instead of trying to cut costs silo by silo, these companies take an integrated view of operations (product design, procurement, manufacturing, supply chain management).

The prize is huge for manufacturers that get it right. Bain research shows that companies can generate an average of 5% to 10% of savings in each category and that an integrated approach could conceivably generate a 15% to 30% net margin improvement—these numbers can make a significant difference under normal conditions and provide lifelines under duress.

A full-blown trade war risks leaving companies with stranded assets. Imagine if a key supplier or manufacturing site is located in a new high-cost zone or, worse, no longer has access to certain markets. Taking an integrated view of operations helps leadership teams identify the alternatives that will deliver the best overall improvement in performance while increasing the company’s resilience.

As inflation and shifting trade relations begin to affect historically stable supply chains, here’s what to watch for among the companies that come out ahead.

Product Design: Put Customers First

Companies often spend large sums of money researching, developing and manufacturing products with innovative features that customers don’t value. By identifying instead the product features that customers really want and pruning away the rest, leadership teams can avoid unnecessary investments and reduce complexity and costs.

Of course, some design issues are strategic and take longer to implement, but many offer quick efficiency improvements. Companies can reduce costs by simplifying operations or standardizing materials that don’t matter to the customer, such as screws. One global food and beverage producer reduced its product cost by more than $12 million by limiting the variety of a certain ingredient to 6 different types instead of 50. At the same time, it quickly cut $5 million from packaging costs by eliminating color and standardizing shipping materials for boxes going to customers, and it identified long-term savings of more than $70 million.

Procurement: Buy Better, Spend Better

When companies set out to cut procurement costs, they typically focus on two areas of savings that procurement offices control directly: price negotiation and supplier selection. Those approaches are critical to buying better, but they may not work in the middle of a trade war with input prices rising. However, spending better—that is, focusing on what companies buy, not just what they pay for it—offers a powerful alternative.

Bain research shows that spending better can potentially more than double a company’s productivity gains from procurement. In some cases, spending better might involve redefining the nature of work or more systematically managing demand. For example, a company might limit its exposure to trade uncertainties by extending the time period for renewing employees’ laptops or cell phones, which are largely manufactured overseas, from two years to three years.

Companies can also improve procurement efficiency by reconsidering whether it makes more sense to produce items in-house than it does to buy them from another company. Manufacturing in-house can reduce exposure to overseas suppliers in the face of a trade war. Companies that rely on near-shore vendors to complement overseas suppliers reduce overall risk. Substitute products also can help lower costs and reduce reliance on key vendors. Satellite communications companies, for example, are shifting away from custom-designed hardware-based components to more standardized designs that rely on software for customization.

Supply Chain: Rethink Distribution and Transportation

Many consumer products companies treat all customers the same when filling their orders, not taking into consideration whether they are large retailers or corner stores. Instead of a one-size-fits-all approach, leading companies bank savings while significantly improving efficiency and supply chain performance by offering a range of transport and logistics service levels at different price points. For instance, Group A might require more pricy overnight deliveries for all goods, while Group B might be satisfied with low-cost 48-hour delivery. 

A more selective approach to product planning can also produce savings. High-volume products with stable demand don’t require the same planning process as low-volume products with less certain demand. Some leading companies are shifting to a model in which high-volume products are replenished automatically, freeing up managers to focus on forecasting for less predictable product lines.

Manufacturing: Rethink Your Network

A trade war could threaten the ability of many manufacturers to supply markets from a low cost base, and advances in digital technology and automation are changing this manufacturing network calculus by reducing costs and allowing a growing number of companies to produce more efficiently in markets with higher labor costs. Additionally, some companies are starting to adjust their global production footprint to improve their efficiency, flexibility and resilience in the event of escalating trade tensions. For instance, when it became clear that the US would abandon the Trans-Pacific Partnership, a trade pact with a bloc of 11 countries mostly in Asia, Harley-Davidson decided to build a plant in Thailand in order to assure a critical supply point in the very important region. The company is also closing its plant in Missouri due to poor sales in the US.

Companies that shift some supply points out of trade-war zones or move part of their production back to the US also benefit from greater flexibility and responsiveness to customer demand. A move by one global consumer products company to consolidate several overseas plants with excess capacity and to shift supply points closer to demand produced more than $20 million in short-term savings by eliminating duties and transportation costs.

The changes to product design, procurement, manufacturing and supply chain management described here are just a few of the tactical moves that creative leadership teams are making to brace for the negative fallout from a trade war and other types of market uncertainty. Of course, these actions are smart moves for companies to make, regardless of whether a trade war develops or not. The larger prize is preparing your business to deal with the steady uptick in raw material prices that already has started to erode margins. An integrated approach to rethinking operations can help companies stay a step ahead of the inexorable rise in costs.

Peter Hanbury is a partner with global consulting firm Bain & Company based in the San Francisco office, and David Schannon is a Bain partner in the Silicon Valley office.

 

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