For many firms, the COVID-19 crisis has triggered a massive shock across their global supply chain. They must now re-think their entire value chain in light of the new normal.
External shocks have always been a catalyst for supply chain redesign, and innovation. Although business continuity plans exist, they may not be comprehensive enough or up to date – typically, in flourishing times they focus on increasing revenues and margins, and not on minimizing supply chain risks.
Today’s crisis is forcing companies to scrutinize end-to-end supply chain transparency and to adjust their sourcing and supply chain strategies.
Many global corporates have been through this before – substantially changing their supply chain to ensure product supply after a crisis. It can be a particularly challenging exercise for companies that rely heavily on single sourcing and may also lack visibility of suppliers beyond tier 1.
Sourcing Optimization For The New Reality
In contrast to past crisis situations, COVID-19 affects supply chains not only on local but on a global scale. Irrespective of this, crisis’ have one thing in common: They introduce many new supply chain constraints.
In response to a crisis, companies are forced to manage these new supply chain constraints when conducting sourcing activities to rearrange supplier networks. This can make it difficult for procurement teams to make supplier decisions quickly and cost-effectively.
However, a sourcing optimization engine can lighten the load. It supports companies to evaluate different sourcing options, while also running comprehensive scenario analyses. By making use of mathematical optimization and advanced analytics, all additional boundary conditions can be considered and alternative sourcing scenarios created within just a few clicks.
At Archlet, we have identified three approaches where sourcing optimization can help companies reach the new normal in the best possible way, by maximizing savings and minimizing risks. The steps are divided into short-term and mid-/long-term actions.
1. Model New Scenarios With New Constraints
The COVID-19 crisis introduces several additional constraints to be taken into consideration for any upcoming awarding decision. Here are some examples:
Geographical constraints – avoid suppliers in certain countries for a specific time period due to high supply chain risks. Consider duties, VAT and tariffs of new countries
Liquidity constraints – payment term optimization and the impact of direct cash flow for example prefer suppliers with longer payment terms
Capacity constraints – consider capacity limitations of suppliers due to missing or delayed supply
Raw material restrictions – quickly enable suppliers to come up with alternative or innovative design choices to reduce, change or mix production materials
Logistics constraints – to reduce risk, use third-party logistics firms that will take liabilities, rather than individual transportation providers
Companies without advanced optimization capabilities might try to include the additionally introduced boundary conditions in Excel spreadsheets. This will entail buyers spending a lot of time trying to derive the best possible short-term adjustments within their existing supply base. But linear optimization solutions can remove the legwork: sourcing optimization allows companies to model new and alternative scenarios quickly while also considering the boundary conditions introduced by the crisis.
2. Redesign For Resilience
Having multiple sources spreads the risk of a disruption among the involved suppliers. In the best-case scenario, the geographic region of the primary source differs from that of the secondary source. However, many companies often rely on one supplier for a specific product.
The ‘single sourcing’ decision is driven by know-how or costs – having two or more suppliers for the same product usually increases administrative efforts, quality monitoring activity requirements and total costs (for example, economies of scale effects are reduced due to the lower volumes allocated to each source).
Companies that redesign their supply chains to mitigate risk need to ask the following fundamental questions:
How do I best split demand across multiple supply options?
How do I minimize my supplier risks while still optimizing my spend?
Building these scenarios in Excel is an extremely time-consuming and error-prone exercise that often fails to convince management to change the ‘as-is’ state.
Using sourcing optimization, the optimal split between incumbents and additional sources can be determined with the help of algorithms. The buyer can quickly model risk-diversification scenarios and identify the cost impact compared with the ‘as-is’ allocations. In addition, supplier risk scores provided by third-party providers (such as Riskmethods or Resilience360 by DHL) can be incorporated in the scenario analysis.
3. Redesign for Agility
The third approach also focuses on a long-term supply chain redesign. The objective is to move from a global supply chain set-up to a more local or regional one.
The time horizon of this approach is mainly driven by local or regional suppliers having to set up new capacity. As outlined in point 2 above, the same effects on cost (increase) and risk (decrease) apply. However, logistic costs in a nearshore scenario are lower than they are for international routes, which involve goods and materials crossing oceans and many more country borders.
Sourcing optimization solutions can help buyers to find the best new scenarios with local/regional suppliers, including the optimal logistics network and routes.
James B. Rice, deputy director of the MIT Center for Transportation & Logistics, states in the Harvard Business Review1 that optimization is a dynamic process, not a one- time process. Firms should regularly revisit and challenge their scenario choices and the strategies that underpin them.
McKinsey & Company also highlights that companies should now start focusing on building smarter, more flexible and especially more resilient supply chains.
With sourcing optimization solutions like the Archlet App, buyers can easily create and assess new sourcing scenarios based on cost and non-cost components. And these solutions are getting smarter all the time, due to their underlying algorithms.
Author: Lukas Wawrla