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Trying to weather supply chain issues? Ask yourself these three questions.

March 15, 2022

The pandemic highlighted cracks in global supply chains causing costly, complex, and chronic issues. For manufacturers, 2022 will continue to bring challenges. Transportation constraints, supply deficiencies, elevated costs, and frustrated customers threaten to impede growth and recovery. Manufacturers need to take steps to manage the impact of these on-going concerns. Consider these three questions.

1. How do I diversify my supply chain?

Sole sourcing from any vendor or sourcing from vendors in one location comes with a high-risk. The pandemic helped further highlight the over-reliance on China in global supply chains. Factory and port shutdowns and the preemptive buying of important supplies by the Chinese government, were wakeup calls for those who had not previously considered diversifying supply sources.

It is key for manufacturers to look at ways they can maintain inventory levels and intentionally create redundancies in the supply chain to avoid a single point of failure. Many manufacturers are actively pursuing a “China Plus One” strategy by supplementing sourcing from China with another country in Southeast Asia. However, if your goods are produced an ocean away from the markets that consume them, there is still uncertainty and the potential for further breakdowns.

Review your supply base for overreliances on a sole source or geography. How can you minimize the distance between the production of your products and where they are purchased? Fully onshoring production may not be practical for your company, but it is worth considering that a supply network has less risk when it is closer to the market of consumption.

2. How should I structure a contingency plan for future supply chain disruption?

We live in a world of rapidly changing conditions. Backup plans must have built-in agility. The pandemic brought a myriad of complexities and for many manufacturers their static backup plans lacked the ability to rapidly respond. This resulted in impractical processes from an implementation or sustainable cost standpoint as manufacturers struggled to receive the level of service they needed from suppliers.

Global supply chains are growing more intertwined with new risks and variables. Tax liabilities, trade compliance risks, and total cost to serve are no less critical considerations than deliverability or lead times. Scenario planning should become a regular business practice. Simulating multiple scenarios to pressure test the supply chain, anticipate issues, and chart the best path forward will help companies be more agile to respond to future disruptions.

3. How do I offset increases in material and transportation costs?

Higher costs in the current supply chain environment are likely to persist through at least Q3. It is important to look at potential inefficiencies. For example, take intercompany movements. If parts and finished goods are shipped via intercompany, ask why. Is there a value add or is it just a historical practice? Does your global supply chain fail to meet the needs of local markets? If so, does keeping production and sources of supply at a distance make sense, or should you establish a near or local market capability?

As you revisit lean initiatives be cautious of prioritizing efficiency at the expense of resilience. Measures such as encouraging your customers to optimize order volume for full truck or container loads as well as more rigorous enforcement of transactional service standards can help manage costs. However, they are unlikely to completely offset them.

Companies can also look at segmenting additional costs onto your customers and developing pricing strategies based on priority level. You may not want to raise prices for your most critical customers, but it may make sense to increase rates for your lower priority customers.

The manufacturing and distribution team at MarksNelson is well versed in the challenges these industries are facing. Reach out to us today to see how we can help your company move forward.

About THE AUTHOR

Shari has deep experience in financial reporting of income taxes and works closely with our business clients, their owners, and key executives to minimize risks in business income tax reporting and compliance. She is skilled at supporting clients with corporate income tax planning and consulting... >>> READ MORE

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