Because we have gone global and live in an interconnected world, events around the world disrupt the global supply chain and impact local customers. Whether its the shutdowns in Shanghai due to the pandemic, the Russia-Ukraine war, concerns about port delays due to the upcoming union negotiations at the ports of Los Angeles and Long Beach, or weather events impacting the supply chain, global events are significantly impacting local companies and communities. The most successful clients are proactively addressing global events and potential global risks to ensure seamless service. In addition, they are taking advantage of the opportunity to take market share from the companies that are using a wait and see approach.
Exploring the Russia-Ukraine war example
For example, the Russia-Ukraine war is already resulting in supply chain disruptions throughout the world. Starting with the obvious, as access to oil and gas is limited, fears of shortages in Europe escalate, and prices have increased dramatically throughout the world. It doesn’t stop at the gas pump. Oil and gas is required to transport throughout the global supply chain, and it is used in a multitude of products. For example, when I was a VP of Operations for an adult incontinence manufacturer, oil and gas prices had a dramatic impact on our costs. Depending on the product, material costs represented almost 70% of product cost, and around 70% of product cost was impacted by oil and gas prices. The second larger cost driver was transportation, and so when prices rose, the negative impact to margins was severe.
Russia and Ukraine also export significant metals, commodities and agricultural products. Shortages of these products will create chaos. The metals are used in the production of cans, cars, electrical batteries, equipment, machinery, electronics, household appliances, and more. In fact, it further aggravates the computer chip shortage issues. Specifically, the U.S. and U.K. are impacted by palladium which is used in catalytic converters. In another example, one of our clients purchased nickel from the region, and so quickly reviewed long range SIOP plans and placed a strategic buy to secure supply and pricing. On the other hand, Turkey, Japan, and China are the top buyers of aluminum.
Agriculture products and commodities are heavily impacted. For example, Russia and Ukraine export wheat around the world. African and Asian importers will be most impacted, and India’s shipments are increasing as higher global prices make its grain more competitive. Sunflower oil is another issue. There are fears that European stores will soon run out, and prices are escalating. Fertilizer will impact the U.S., Brazil, South Africa and India. The risks of a truly global supply chain have been highlighted.
Using S&OP (also known as SIOP) to Navigate Rough Waters
Clients utilizing a Sales, Inventory & Operations Planning (S&OP) process are more resilient to these changing and volatile global conditions. More importantly, S&OP (also known as SIOP or IBP for Integrated Business Planning) provides the data and highlights the strategic decisions required to ensure end-to-end supply chain alignment, EBITDA performance and the appropriate strategic positioning and levels of inventory and capacity to successfully support customer requirements with enough flexibility to accommodate changing conditions.
The types of strategic decisions that might bubble up to the executive SIOP meeting due to global events including the following:
- Reshoring/ nearshoring production to ensure product availability
- Increasing capacity and capabilities through the manufacturing network to increase the capability and flexibility to move production and pivot with changing conditions.
- Repositioning capacity through your network to best support changing customer conditions and to best mitigate the more probable risks and likely global events.
- Developing strategic partnerships with critical material and component suppliers to ensure geographic diversification and alignment with service policy requirements.
- Repositioning and reallocating inventory through the supply chain network to best support changing customer conditions
- Repositioning and redesigning the supply chain network (inclusive of internal and external resources) to support changing customer needs, stocking strategies and distribution and transportation strategies.
- Making strategic purchases to ensure supply and mitigate inflationary pressures
- Analyzing and confirming customer pricing and priority decisions related to available resources, customer profitability and strategic relationships.
- Evaluating product rationalization and stocking strategies based on product profitability, logistics infrastructure and related impacts.
- Supporting new product development and R&D rollout plans
- Evaluating typical distribution vs. e-commerce fulfillment strategies
Client Example in Proactively Navigating Global Events
For example, a building products manufacturer saw changing demand patterns show up during their monthly demand planning SIOP review. In reviewing CRM and order data, Sales input, market conditions, and customer feedback, they saw that one of their customer segments was negatively impacted with supply chain disruptions because their customers couldn’t produce due to a critical material shortage. Their revenue was negatively impacted because the customer slowed purchases in alignment with these changing conditions. Instead of panicking, the building products manufacturer got in touch with their customer to understand if the slowdown in sales was temporary and would bounce back when the critical material was received or if the disruptions created further misalignment, causing a reduction in sales for the year. In this case, the customer expected shipments to pull through on an extended timeframe as the critical material arrived and resources were available to produce, and so the manufacturer proactively addressed the capacity shortfall with temporary measures while securing the appropriate resources for the long term.
Separately, the manufacturer saw that another customer segment was forecasted to experience significant volume increases during peak season which would require additional storage capacity to build product and ramp up to support customers with high service levels (on-time-in-full, OTIF). Thus, the manufacturer evaluated this customer segment from a customer and product profitability perspective to make sure the additional storage capacity at their outsourced distribution network and the additional freight movements required throughout their network to support service policy commitments would make sense from a customer pricing and profitability perspective. After negotiating to consolidate their regional network space at a lower cost, the manufacturer decided to add the capacity to the logistics infrastructure to support the expansion in sales.
Similarly, the manufacturer maxed out in manufacturing capacity at one of their manufacturing facilities to support this customer segment during peak season, and so they had to evaluate the increased cost of intercompany transfers, cross-border freight, and the differences in manufacturing costs. Although there was a negative impact to costs, they decided to proactively address capacity to expand business with a strategic customer since there was an opportunity to take business from the competition based on availability, and they could pass along price increases to offset some of the difference.
SIOP Is Not a One Time Solution
Setting strategy for the next 5 years no longer works! In fact, most companies find that setting strategy a year out can be a tall order. During times of volatility and change, it is critical to stay on top of your changing market conditions and customer needs, incorporate new and changing product and service offerings, and constantly reevaluate your end-to-end supply chain for what will best position you for success.
SIOP is not an off-the-shelf solution, and it is not a one-time “magic bullet”. Instead, the most successful clients look out a minimum of a year to three years (if they have long-term customer contracts) on a monthly cadence, incorporate changing conditions, and evaluate results. Typically, they will reconfirm prior decisions and priorities and address critical changing conditions. Of course, this process must be accompanied with strong execution. If you follow this path, you will thrive during these times of volatility and unexpected global events. In fact, the resilient and innovative companies have a once-in-a-lifetime opportunity to gain significant market share during these volatile times. Listen to additional insights on this topic and how companies can get ahead with a silver lining in the cloud of supply chain confusion as LMA Consulting was interviewed by the Truckers Network Radio Show.
Refer to our SIOP landing page for information about SIOP and how to get started on your journey. Also, read more about these types of strategies in our eBook, Thriving in 2022: Learning from Supply Chain Chaos. If you are interested in talking about what it would take to purse the SIOP journey in your business, contact us.
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Taking Control of Customer Success Using SIOP