The global supply chain has been in crisis for many months now — and all signs point to disruption and uncertainty remaining the status quo for years to come. Findings show that manufacturers are very concerned about being able to deliver their products or services at acceptable margins now and in the future. The C-suite executives in the manufacturing and distribution industry group who responded to our annual survey ranked supply chain concerns as the top risk issue for their organizations not only for this year, but also for the next decade.
Raw material shortages, transportation delays, skyrocketing shipping costs, and the exponential growth of consumer demand via e-commerce channels are just some of the issues companies have been trying to overcome or meet throughout the COVID-19 pandemic. Other dynamics ratcheting up the pressure on fragile supply chain networks include surging inflation — which hit a 40-year high of 7.5% in the U.S. in January — looming interest rate hikes and increasing geopolitical tensions. Russia’s invasion of Ukraine has sent global commodity prices soaring for everything from steel to sunflower oil.
According to a Federal Reserve survey of chief financial officers (CFOs), almost 90% of businesses saw larger-than-normal cost increases in the fourth quarter of 2021 due to extraordinary supply chain constraints, with most CFOs reporting that they expect this trend to continue. Against this backdrop of complex supply chain challenges and rising costs, many companies are struggling to plan cash flow and revenue effectively — and consumers are literally paying the price.
Short-term fixes help ease pressure, but they aren’t sustainable
In a recent analysis on supply chain risks and their impact on the budgeting and forecasting process, 50% of senior executives across various industries reported that their companies are passing along higher supply chain costs to their customers. Many also report their companies are absorbing costs, to the detriment of their bottom line. Neither situation is sustainable, of course. Also unsustainable is inventory stockpiling as a strategy for managing potential revenue loss due to supply chain challenges. Yet, over half of the respondents indicated that they are employing this approach.
Companies can’t keep hobbling along with short-term fixes for their supply chain woes, even if such measures do help ease pressure and aid in getting goods to customers. They also need to stop playing “kick the can” when encountering fundamental supply chain problems that demand long-term solutions. Operating the supply chain as a cost center, prioritizing leanness and cost-effectiveness above all else, and continually putting off supply chain network redesigns are not sustainable approaches in this volatile environment.
Flexibility and a forward-looking perspective are the keys to operating supply chains successfully moving forward. So, too, is understanding critical risk exposures end-to-end in supply chain networks.
Greater harmony between supply chain and finance teams builds resilience
Businesses used to have the luxury of creating financial forecasts monthly or quarterly. Now, this process must be conducted on a more real-time basis. The pandemic has caused many finance organizations to adapt their approach to forecasting. By working closely with the supply chain office on forecasting, finance organizations can help the supply chain to become more flexible, agile and predictive in meeting the challenge of future disruptions.
The value of connecting supply chain to financial forecasts is that it provides companies with insight into what they can and cannot control — and, importantly, what they can do better — to find financially smart solutions to address supply chain challenges amid constantly changing market conditions.
Technology — especially machine learning and AI-powered solutions that offer both real-time insight and predictive capabilities — can help finance and supply chain work effectively as partners to connect supply chain scenarios with financial forecasting and planning.
Traditionally, the relationship between supply chain and finance teams hasn’t been one of proactive collaboration. However, by getting these teams to work in greater harmony, organizations can identify the best short-term fixes to ease immediate supply chain disruptions and pressures while helping the business make more informed, strategic decisions that will lead to their supply chain becoming more resilient, flexible and predictive over time. And, then, there will no longer be any impulse to play kick the can.