The value of supply chain network visibility

Supply chain managers can usually assign a value to delivery delays in terms of lost sales or profits, but how about less obvious costs? Shaky supply chain issues erode customer trust, public perception and eventually shareholder value. There are also measurable financial gains – effectively managing supply chain risk creates cost and operational efficiencies.

 

But how do you assign financial value to all these factors for executive-level discussions about the true cost of supply chain risk?

 

In framing a financial discussion about the financial value of managing supply chain risk, there are ways to begin quantifying key factors:

1. Production stoppage/constraint: The most obvious and often cited cost, calculated by revenue or margin loss/delay, plus cost absorption inefficiencies from idle workers and/or increased expedited freight delivery while operations recover.
2. Lost sales/revenue: Tricky to quantify accurately, as it involves multiple factors, including demand, inventory and alternatives.
3. Lost customers/market share: A close cousin of lost revenue but even harder to gauge.
4. Reputation: This cost can be as heavy as a PR disaster or as manageable as a late delivery. Includes compliance and safety issues.

 

Every organisation is on a learning curve for finding the right agility and redundancy balance for every link in their supply chain. Those who find the solution first will emerge as industry leaders.

 

There is a proven formula: visibility (holistic risk insights) + flexibility (proactive risk mitigation and response) = supply chain value. Close the value gap by identifying your most pressing supply chain risks and building processes to leverage the most useful analytical insights to minimise them.

 

Step 1: Gain visibility

 

Value calculations are only as useful as the input data, which means collecting as much information as possible from across your supply chain. Dig deep into multiple tiers, because many disruptions happen past Tier 1. Although this critical data has traditionally only been visible by relying on self-reported surveys, companies can now leverage analytics to uncover more detail. Evaluate potential disruptive events through the lenses of event size, impact, likelihood and frequency.

 

Now is the window of time to figure out this formula before your competitors. An external-facing supply chain risk assessment in conjunction with an internal risk-tolerance analysis will inform decisions on what level of risk your operation will accept and the investments in management you should consider.

 

Step 2: Build flexibility

 

Building flexibility into your supply chain requires an appetite to invest in resilience (inventory and alternate sources are not without cost). This means building (and hopefully automating) operational processes that evaluate and optimise source and supplier flexibility, so managers can choose the right option at the right time if something goes wrong in the network.

 

Effective flexibility strategies can also lead to reduced freight, inventory and material costs, along with improvements in on-time performance and customer satisfaction.

 

Step 3: Hit your speed goals

 

Demand and sales and operations planning, sourcing, production and distribution can all be affected by ongoing events. These impacts can be profound and long-lasting, as illustrated by long recovery times for companies affected by COVID-19 supply chain impacts.

 

Today, thanks to data analytics, businesses can quantify the value of proactive responsiveness to supply chain disruptions. Predictive risk data can help them meet their goals and stay on time.

 

Proactive value vs reactive costs

 

At Everstream, we regularly run value analyses for our customers, who include some of the world’s largest manufacturers, distributors and producers.

 

We analysed the impact of a single day of downtime for a large manufacturer, including lost revenue, working capital and expedited freight costs to make up for the delay. We also dig into less obvious costs, including customer satisfaction and return on human capital.

 

The gross margin impact of a day’s disruption at a single manufacturing site was calculated at almost $275,000. This “minor” disruption translates to a drop in shareholder value of more than $6 million. The loss also creates non-quantifiable sinking public perception and consumer trust, which are compounded when competitors avoid delays and seize market share.

 

A resilient, agile supply chain requires capabilities, strategies and tactics that:

• Provide visibility and “control tower” orchestration
• Assess, quantify and assign value to supply chain vulnerabilities
• Prioritise vulnerabilities based on the level of risk and the magnitude of the importance of the product/material/shipment to revenue/margin
• Deliver appropriate redundancy and contingent capacity, with processes to switch them on at a moment’s notice
• Develop innovative approaches to anticipate and quantify future supply chain challenges, risks and vulnerabilities
• Implement processes, tools and automation to address them

 

A resilient supply chain not only reduces risks but also anticipates, rapidly adjusts, recovers and even capitalises on unanticipated supply chain events or disruptions. True supply chain resilience is about growth and competitive advantage – not just disruption avoidance and mitigation.

 

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Want to learn more about building a more resilient supply chain? Visit everstream.ai