Strategic Sourcing has always played an understated role when it comes to business success. The fact is that companies that get this right should deliver lower product costs or higher margin propositions that directly impact EBITDA. Similarly, just as sourcing has led the way out of a crisis before, this function is well placed to do so again in the wake of the latest Pandemic. However, success will require a wholly different approach going forward.
The ‘New Now’ is a heady concoction of working from home, virtual meetings, a lack of travel and a prominent relationship with your computer screen (and those behind it!). This should ease over time (one hopes). However, the evolution of retail has been ushered forward at a quicker pace than anticipated. Consequentially, Retailers and Brands are having to think through how they adapt to meet the expectations of their customers.
However, while past economic downturns mainly focused on the financial implications (survival, cash preservation etc), the “New Now” has the added complexity of an already shifting sourcing landscape, volatile demand and the need to build robustness into the supply chain to address at the same time. How should companies therefore move forward? What are the changes they should look to make to their China Sourcing or Vietnam Sourcing strategy? We will highlight some key areas below, but one point that is pertinent is the need to act now, which could be a challenge for some companies; one obvious example being (understandable) budget constraints.
Building Supply Chain Resilience
McKinsey, the strategy consulting firm, has released a recent report on “Risk, Resilience & Rebalancing in Global Value Chains” that points to the need to build robustness within complex global value chains. It notes the increased frequency of supply chain shocks but also the increasing severity of these events, which can be a result of climate change, financial crises, trade disputes, pandemics, cyber-attacks, terrorism and supplier bankruptcy. Interestingly, the report quantifies the intervals that can be expected for different lengths of disruption:
- 1-2 week disruption: 2.0 years
- 2-4 weeks: 2.8 years
- 1-2 months: 3.7 years
- 2+ months: 4.0 years.
This certainly underlines the necessity to build in a layer of resilience to any company’s supply-chain given the potential for disruption. This “New Now” is built around this need to be more resilient but also more agile and efficient in how the Sourcing function acts.
Strategic Sourcing 3.0
The Pandemic is clearly one of these shocks and one that has lasted longer than 2 months in some cases but uniquely has had a global impact which has covered both supply and demand. There are clear lessons to learn where significant disruption has been felt. We have set out some of our thoughts on what is required for companies and their supply chains going forward.
1. Supply Chain Resilience
An obvious starting point. Companies who have found themselves in only one market and with limited suppliers would have had issues difficult to solve. Continuity builds resilience and having contingency plans is always beneficial. To do this develop a deep understanding of your suppliers beyond Tier 1 manufacturers (ultimate transparency). Look to also multi-source across jurisdictions to eliminate any country-specific risk.
This has been a recurring theme across some of our past newsletters. True value creation will be reliant upon the relationships you have across your supplier base. This can mean co-investing in ranges, committing to a period beyond transactional cost led order cycles or paying that little bit more to enable investment at the factory level that will in turn drive future efficiencies and cost reductions. Ultimately, innovation needs to be a collaboration over a medium-term horizon. Certainly, you should also consider partnerships across the supply chain (such as digital platforms and service providers).
Agility within the sourcing function will be critical. This may be a challenge where more traditional roles and management structures have been historically used across most sourcing functions, and particularly more so in Asia. The ability to respond quickly to changing circumstances will be important going forward as demand remains elusive and supply challenging. For example, setting up strategic cross-functional teams for targeted opportunities.
4. Digital & Analytics
The retail sector has been talking about this for years. However, the budget has often not been made available to truly invest in digital and analytics to bring greater efficiencies and meaningful data collection. This has now changed given most companies both working remotely and at a distance from their suppliers (being ‘locked out’). Such capability covers aspects of supplier mapping, automation, risk analytics, quality control technologies right through to vendor performance management.
Consumers have had a chance to re-evaluate their behaviour and how they used to consume products. The likely trend will be a re-emergence of sustainability across factories, products and logistics to align to this demand. This will result in additional drivers ranging from quality to reliability on top of pure cost opportunities in lower-wage countries. Look for suppliers that can support your needs as well as developing regulatory frameworks as well.
The importance of Strategic Sourcing
Strategic sourcing is an important component of any business. It is more critical than ever to invest in your supply chain and make sure you are working with the right partners to drive value to your business. Those companies that adapt and push through change across their sourcing function will return to pre-pandemic levels quicker than their competitors (albeit no guarantees that your colleagues will move from the virtual to the real world in the near term!).
At ET2C, we can help manage your Asia Sourcing across multiple markets with teams on the ground as well as work with our clients on elements of the ‘New Now’. Do you want to know more about the future of sourcing? Join our Free Webinar on September 17th! Our team will share some ideas and thoughts on the road ahead.