Trying to navigate through unprecedented levels of economic ambiguity with record inflation, fluctuating interest rates, and unsettling macroeconomic problems is no walk in the park. This climate of economic uncertainty continues to cast a shadow over the future of the supply chain, and it’s prompting buyers and suppliers to rethink their relationship dynamics.
A recent article published by SupplyChainBrain explores how the buyer-supplier relationship has been impacted by the situation. The economically unstable landscape follows a series of major global disruptions from the last few years which caused a lot of financial strain on businesses. Both suppliers and buyers are experiencing risk and have been forced to pivot in response to the circumstances.
Suppliers want to ensure that they receive advance payment for the goods they provide, while buyers want to conserve their cash flow until they are confident that they can sell their products. This dynamic is creating tension between buyers and suppliers, making it difficult to maintain a strong relationship.
As companies strive to maintain a stable and efficient supply chain, they find themselves grappling with two primary challenges: access to materials, and effectively managing costs. These challenges are inextricably linked to inflationary pressures, which not only lead to rising interest rates but also result in higher prices for both suppliers and buyers.
Additionally, the shift towards a "just-in-case" inventory approach, driven by the need for resilience, has increased the burden on suppliers and buyers to maintain higher inventory levels. The traditional just-in-time approach focused on efficiency and minimizing inventory has proved a risky strategy in times of uncertainty, because it requires a high level of commitment and investment – so companies have increasingly turned to hold more inventory as a precaution. But this has an impact on the ability to convert that inventory into cash and manage cash flow effectively.
How can you effectively navigate the economic uncertainties while positioning your company for success? This climate calls for increased alignment and collaboration with suppliers. A focus on strengthening the buyer-supplier relationship is crucial to yield strategic advantages and drive mutual growth. We’ll explore a couple of key strategies here.
Postponement Strategies to Reduce Supply Chain Risk
Postponement, which refers to the strategic delay of certain manufacturing or customization activities until closer to the time of customer demand, has gained momentum in recent years as businesses seek ways to mitigate risk and reduce the need for excess inventory. Instead of producing finished goods well in advance, companies hold semi-finished or generic products in their inventory until specific customer requirements are known.
By postponing the final stages of production, companies can reduce the overall amount of inventory they need to hold, and therefore reduce the amount of working capital tied up while minimizing the risk of stockouts or overstocking.
This allows for more agile and responsive decision-making, reducing the risk of holding excess inventory that may become obsolete or go to waste.
Shortening Lead Time Through Collaboration with Suppliers
In times of economic uncertainty, shortening lead times through collaboration with suppliers can also be an effective strategy.
Shorter lead times enable a more efficient use of resources and allow suppliers to streamline their production processes, resulting in increased operational efficiency. By collaborating closely with buyers and gaining insights into their demand patterns, suppliers can align their production schedules and inventory levels accordingly. This synchronization enables suppliers to optimize their resources, reduce idle time, and operate at higher efficiency levels, ultimately enhancing their profitability.
We discussed this topic during a recent meetup with several of our customers. One of the key learnings from this discussion was the role of technology to help spur greater collaboration and improve resiliency by providing better signals up and down, and throughout the supply chain. The net effect shared was an overall lead time reduction while reducing some buffer inventory that previously built up due to a lack of visibility insights into what was happening upstream or downstream.
Collaborating closely with suppliers and reducing lead times allows companies to become more agile and responsive to changes. Shorter lead times enable quicker adjustments to fluctuations in customer demand, so businesses can adapt swiftly and avoid excess inventory or stockouts.
This strategy can also contribute to cost optimization throughout the supply chain, as companies can minimize the need for excessive inventory and lower inventory carrying costs.
Turn The Challenge Into Opportunity
With many risks and challenging factors at play, companies must recognize the importance of maintaining stronger relationships with suppliers. While an increasingly complex environment can aggravate tensions, forging a more collaborative approach will allow both buyers and suppliers to benefit from the relationship.
Strategies such as postponement can reduce supply chain risk by delaying certain manufacturing or customization activities until closer to customer demand, minimizing excess inventory and working capital. Additionally, shortening lead times through supplier collaboration enables greater agility and responsiveness to changes in customer demand, helping to avoid stockouts and excess inventory.
Embracing these tactics and leveraging supply chain planning technology can enhance resiliency and contribute to long-term success in an uncertain economic landscape.