Diversify Your Supply Chain with Strategic Sourcing
By Melzie Robinson, Gibson Consulting Partner
This article is even more relevant given the COVID-19 pandemic’s global impact. Diversifying the supply chain is critical to ensuring the best choices of supply, cost reduction, and efficiency – ensuring sustainable brand value. As of May 2020, the United States has slapped tariffs on US$550 billion worth of Chinese products. China, in turn, has set tariffs on US$185 billion worth of U.S. goods. Both sides have also threatened qualitative measures that affect U.S. businesses operating in China. Negotiations are ongoing. Meanwhile, countries have responded to the COVID-19 pandemic with large economic stimulus packages as shutdowns cause worldwide planning and sourcing uncertainty. Manufacturers are suffering severe supply chain, operations, personnel, and revenue challenges.
Given the U.S. and Chinese tariffs and resulting trade wars, there is an emphasized importance of reducing supply chain sourcing risk in this current economic environment. This article discusses supply chain current events, future trends, executive concerns with risks, and tangible results we have delivered with clients that have mitigated risk through supply chain diversity.
Beginning with the end in mind
We find that only two out of ten companies can be classified as true “mitigators” of supply chain risk. There are many ways we have helped clients who are interested in reducing supply chain risks. Some have typically included:
- Reimagining the supply chain and sourcing strategy
- Reducing tariff impact by building a more efficient supply chain
- Realigning the global sourcing portfolio
- Revisiting the manufacturing, logistics, and contracting footprint
You may want to consider where the greatest opportunity lies within your own company.
As shown below, we have uncovered supply chain opportunities and mitigated risks across many industries using our proprietary 11-gate process. In each case, our clients have brought their unique challenges to us. Unlike many consultants, before we act, we truly listen to you and your organization’s unique challenges.
Global Supply Chain Case Examples
|Client||Strategy||Risk Mitigation||Total Savings|
|1. Industrial Manufacturer||Redesigned supply chain, used 11-gate process, and leveraged volume across global geographies with 80% of global spend.||Mitigated trade and high tariff country risks, selected best of the best suppliers, used some of the cost savings to reduce customer pricing in competitive country.||$210MM|
|2. Specialty Chemical Company||Price Reduction, Volume Discounts, Rebates, Long Term Contracts, Payment Terms||5-Year supply agreements with top companies, used some of the cost savings to reduce customer pricing in competitive country, Co-Location Plant. Improved S&OP forecasting.||$50MM|
|3. Private Equity Firm||Developed supply chain strategy, improving sourcing, while streamline the manufacturing, logistics, and contracting footprint||Supply Chain Cost Reduction, standardization, lean processes, warehouse and transportation efficiencies.||$112MM|
|4. Construction Company||Realigned the global sourcing portfolio||Supplier Reduction, Value Added Services||$105MM|
|5. Equipment Manufacturer||Reduced tariff impact by building a more efficient supply chain. Formed Asian Procurement Office.||Mitigated trade and high tariff country risks, selected best of the best suppliers, used some of the cost savings to reduce customer pricing in competitive country||$87MM|
How did we get to the current crisis?
As part of our supply chain strategy formulation, we evaluate the global trends and current trade and tariff landscape for each category of spend for clients as shown in a WTO’s global chart for electrical machinery (darker colors show higher tariffs in 2017).
Understanding the landscape is increasingly important due to the tensions from the U.S.-China trade war, the risk of disrupted supply chains, and waning demand weighing down business confidence and spending. For example, CNBC recently reported, “President Trump’s latest volley in the trade war brought what strategists say is the strongest response yet from China – a weakening of its currency to a key threshold markets once thought was a red line.”
U.S. -China Tariffs Still Show Uncertainty
|Date||Amount||Tariff||Examples of Products Imported from China|
|7/6/2018||$34B||25%||Cars, airplane, auto parts, machinery|
|8/23/2018||$16B||25%||Chemicals, Train parts, Motorcycles|
|5/10/2019||25%||Increased from 10% to 25% on Thousands of items: paper, fabrics, car parts, yachts|
|9/1/2019||$300B||10%||clothing, microwaves, TVs, plastics, lawn mowers, plastic products|
|1/15/2020||Begun phase 1 negotiations: $550B U.S. on China and $185B China on U.S.|
|5/19/2020||China commodity exclusions due to COVID 19 (e.g. medical disinfectants)|
What are top companies doing? Does this sound familiar?
Companies across the United States are performing tariff related cost analyses and reaching similar sobering supply chain business conclusions:
- Lincoln Electric: The welding equipment and supplies maker is raising prices on so-called consumables via surcharges to offset the costs of tariffs.
- Alcoa: The aluminum-product manufacturer cut its profit forecast ranges by $500 million, citing tariffs on aluminum it imports from Canada.
- General Electric: The U.S. conglomerate, which faces $400 million a year in tariff-induced costs, is considering adjusting its supply chain to mitigate the effects.
- United Technologies: The company, which owns Pratt & Whitney, Carrier, and Otis, says tariffs are reducing its earnings. It is looking at cost-cutting measures to compensate.
There is no crystal ball, but many experts expect things to get worse before getting better. Oxford Economics reported on July 27, 2019 that a full US-China trade war with 10% US tariffs on an extra $400 billion of imports from China and 25% Chinese tariffs on all US imports would cut US growth by 0.7% in 2019, Chinese growth by 0.8pts, with 700k+ US job losses, and more in China. This was BEFORE COVID-19 hit!
COVID-19 has severely disrupted the supply chain, personnel, operations, and revenue of the manufacturing segment. Supply issues also plague Travel, Retail, Energy, High Tech, and Healthcare.
Source: Computer Economics; Avasant
Introspection: What top companies should ask themselves
There is much uncertainty across an array of spend categories. Consequently, you, your executives, and company investors may be troubled by three gut checking supply chain risk questions:
- Are you sourcing and manufacturing from the right countries given dynamic tariff and trade policy and COVID-19 risks?
- Do you have the best supply partners, providing service and lead time needs of customers?
- Can your supply chain teams execute projects with excellence to realize bottom-line impact?
Companies often get blind-sided by not launching initiatives that comprehensively address these questions. Strong companies completely mitigate their risks. Being great in one aspect is necessary but not enough. High-risk weaker companies are strategically flawed, have the wrong partners or lack project implementation. As you read, ask yourself if any of these scenarios sound familiar.
Below is a description of our segmentation of companies that do not mitigate country, supplier or execution risks compared to those who do.
- The efficient non-strategists: As author Stephen Covey says, “If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster”. The efficient non-strategists are companies that do not focus on the “strategic” geography of sourcing or manufacturing materials and services. It is like building an excellent ladder, but it will be placed on the wrong proverbial wall. Sourcing or manufacturing from the wrong countries injects significant demand risk by jeopardizing responsiveness, lead times, and price-insensitive cost infrastructures that provides mediocre service levels for customers. It is critical for companies to do its due diligence on trade & regulatory current events, trends, and forecasts of its key procurement categories – country by country and region by region. Does this sound like your company?
- Working with vendors, not supply chain partners: Many companies confuse vendors with supply chain partners. Analogously, the difference is that vendors bring hammers while partners help you construct the building through parts, innovation, and process improvements. Superior supplier research allows companies to expand from a base of incumbent suppliers to include enough alternative suppliers, thus mitigating risks. When companies’ competitors select better supply partners it translates into advantages in market share, cost, and service. Does this sound familiar?
- The academics: The academics are companies that have a clear strategic blueprint coupled with ideal supply partners. However, they just cannot seem to realize the identified financial benefits. They lack strong skills and capabilities in rigorous implementation. Consequently, over 70% of identified opportunity, never hits the bottom-line. Do you hear, “Where are the results?” in meetings?
- The supply diversifiers & risk mitigators: Suppliers, their location, and sourcing execution all contribute to overall supply chain risk and are inherently related. The “mitigators” are companies that understand the relationships between these three critical elements in developing an agile supply chain with diverse sourcing options. If this is your company, give yourselves a pat on the back because you are at the top.
Practical business considerations
There are several best practices to consider, including using different supplier types, prioritizing categories, and building a reservoir of savings.
1. Picking Suppliers
From a strategic perspective, it is important to understand the types of suppliers (strategic partners vs transactional) and what supplier types your company requires. How you categorize your suppliers helps guide the actions you can take to mitigate risk throughout the supply chain.
For example, understanding the manufacturing footprint of your supply base is essential to properly gauge your exposure. Ideally, key parts, defined as critical to the end-product with a high annual spend, can be sourced from multiple countries, limiting exposure to potential tariffs.
For a strategic partner, both parties must have an agreed upon plan in the event tariffs are imposed. For a supplier with multiple manufacturing facilities, moving production to a different (non-tariff or low tariff) country must be discussed. As always, the devil is in the details. Knowing what parts and what tools must be moved beforehand as well as the impact on quality and logistics, makes the implementation of shifting production a much smoother process.
Some good suppliers have only one manufacturing facility. To maintain production flexibility, production can be divided between multiple suppliers who manufacture in different countries. Understanding a supplier’s current and future capacity allows you to flex production based off market constraints.
These companies excel at the execution of the advantages working with what we call the “best of the best” supply partners with strategic geographical footprints. They focus on sustainable results by providing ongoing training and coaching of supply chain staff, insuring contemporary capability.
Almost all global supply chains contain both strategic partners and transactional suppliers. At Gibson, we have significant experience creating a supply base tailored to our client’s needs, maximizing financial impact, and mitigating supply chain risks.
2. Prioritizing Sourcing Categories
On the risk mitigation journey, you organize by sourcing categories. This includes classifying all the commodities, components, products, and services that you buy according to the supply risk and potential profit impact of each.
- Supply risk is high when the category consists of scarce raw material, when its availability could be affected by government instability, trade wars, or natural disasters, when delivery logistics are difficult and could easily be disrupted, or when there are few suppliers.
- Profit impact is high when the category adds significant value to the company’s output. This could be because it makes up a high proportion of the output (aluminum for an appliance maker) or because it has a high impact on quality (the glass used by a high-end window manufacturer).
3. Create a “reservoir of savings”
Structuring supply chains to mitigate risk while achieving best cost, yields significant strategic advantages. Transitioning to a Best Cost Country Sourcing model saves our clients millions of dollars, creating what we call a “reservoir of savings” (coming from price, logistics, transportation, value engineering, operations cost reduction etc.). Gibson then works hand in hand with our clients to best utilize this new strategic advantage.
For example, we have worked with clients who were able to lower their product prices, resulting in double digit market share growth. With tariffs being recently imposed, many of our clients have been able to stay price neutral while their competitors have been forced to pass on additional cost. Others have been able to invest in new technology, better systems, and their own people. Understanding where and how to invest the reservoir of savings will yield you even greater returns.
Below are three category level case examples in companies Gibson has helped become mitigated risk companies. In each case we:
- Developed 5-year supply chain strategic roadmap
- Mitigated supplier, trade, currency risks
- Identified pricing and operational savings
- Provided training to build skill and sustainability
|Scope||Company spent $130MM in Hydraulics annually. Supply base was fragmented consisting of many small companies throughout the United States, China, and Germany. Company was making hydraulic cylinders at one plant location in an attempt to consolidate spend.|
|Scope||Company spent $200MM in raw material annually. Over 90% of spend was with one supplier. Company was having to absorb consistent price increase or risk production stoppages.|
|Scope||Company spent $150MM in electrical components annually primarily out of China. Despite lower than domestic price cost, quality, delivery, and packaging issues were causing high operational and logistics costs creating strained relationships|
Rate your company’s global best cost country sourcing performance
We have three questions to ask you about your organization:
- Are you just testing the waters (level 1) or capturing global advantage (level 5)?
- Where would you place your competitors?
- Where would you like to be?
Supply Chain Diversification:
We Help Companies Improve Their Best Cost Country Sourcing
Testing the Water
- Recognize B.C.C.S Potential
- May source some products/components on a limited basis
Purchasing Components and/or Complete Products
- Focus on reducing purchasing costs
- Obtain valuable understanding of the supply base
Develop Comprehensive Sourcing
- Sourcing plan includes
- Products (select)
- Advantage gained from
- Supplier relationships
- Product Development
- Proprietary tools and processes
- Market intelligence
Adopting as integrated B.C.C.S strategy
- View B.C.C as both a market and a sourcing location
- Leverage synergies between export sourcing and domestic production
- Integrated capacity planning
- Flexible production
Capturing Global Advantage
- Exploit global synergies in
- Cost structure manufacturing strategies
- Supply chain
- Leverage best global capabilities
- Deploy high-cost assets
As COVID-19 is wreaking havoc on company supply chains, leaders are addressing issues on several fronts as a clarion call to action for immediate and post-crisis change. Specifically, we have found that companies are working on Purchasing, Best-Cost Country Sourcing, Manufacturing, Value Delivery Model, and Distribution & Logistical Networks. Where is your urgent focus?
Start overcoming your company’s blind spots
S.O.O.S.—Supply Chain Success and Results are Driven by a Holistic Diagnostic
Observations are collected from commodity and personal surveys, site visit interviews, supplier interviews and data reports. Findings are categorized using the following S.O.O.S. model:
- Key strategic issues facing the company
- Identification and handling of the key issues, challenges
- Purchasing strategies and supply chain processes
- Day-to-day supplier management and operations
- Departmental projects and activities
- Continuous improvement sourcing processes
- Organizational structure of purchasing
- Capabilities of engineering and purchasing
- Purchasing’s role within the organization
- Collaboration with other departments
- Network infrastructure and operating systems
- Use of e-sourcing tools and data analytics
- Use of technology for purchasing organization wide
We start with a brief supply chain and sourcing assessment, using our S.O.O.S. model to determine what is working in your organization and to identify any blind spots in your supply chain.
Our final assessment shows you where your supply chain risk is located, where there is savings potential, and how to execute to maximize financial impact while mitigating your risk.
Our Gibson Partners have saved over $10 Billion across 2,000 categories at 18-23% savings with 50% to 200% typical client EBITDA impact from strategic sourcing projects. We have analyzed over 500,000 supplier profiles (super-sized RFPs), conducted over 5,000 supplier negotiations, and led thousands of executive training sessions. Our consultants hold the tools and experience to deliver results.
If any of these challenges sound familiar we should talk. Please fill out our inquiry form or call us any time at 312.291.4640. We are here to help.