Risk goes hand in hand with supply chain management in today’s globalized business environment. As supply chains continue to extend across the world exposure to risk increases. Tariffs and trade wars compound fear of risk exposure following many well documented, costly supply chain disruptions in 2019 has pushed risk management right to the forefront of corporate strategy.
In this light, Reuters Events: Supply Chain have just released our latest whitepaper: Surviving Global Uncertainty: How to Mitigate Supply Chain Risk.
A question that many of my clients have: How tariff proof is my supply chain? Consequently, developing a risk mitigation plan is a top board level priority for many brands today. The question then becomes how to do this effectively. As Kelly Halloran, Supply Chain Director, DKB Household USA puts it: “Effective risk mitigation means being both proactive and reactive. Not only on being able to create a mitigation plan, but also building in the capacity to be reactive to volatile conditions and potential for rapid changes,”
Practically speaking then, what steps should one take to ensure their business can be reactive? One important area is prices and cost of goods. This means testing ‘if, then’ scenarios. For instances, if costs rise, to what extent can prices rise and how will this impact demand considering price elasticity. Running scenarios like this means businesses can react as quickly as possible, making instant decisions on the back of potential changes, and enabling data driven discussions with suppliers and customers to protects cash flow and margins where possible.
Inventory coverage should also be a priority assessment. As a reaction to fluctuating tariffs, many businesses respond by ramping up their inventory to prevent paying additional tariffs. However, perhaps a more effective approach lies in reducing inventory coverage by challenging suppliers to work on their lead time – as such you have the ability to be more flexible, monitoring costs in close-to-real-time, as opposed to looking 90-120 days ahead. While this approach is arguably more effective, there’s no doubt it’s more complex as it necessitates renegotiating contracts and lead times with suppliers. Naturally, this may also have a knock-on effect on pricing analysis which must be injected into the pricing equations discussed above.
Geographic diversification in your global sourcing strategy may well yield further minimise risk. “Geographic expansion spreads this risk, but comes with its own set of complications,” says Halloran, “Establishing new supplier relationships, understanding the infrastructure of an alternative supplier region and the availability of raw materials to manufacture your products must all be factored into any diversification strategy.”