Four Situations to Avoid to Keep Supply Chain Costs in Check

Greg Castello


April 17, 2017

A robust supply chain helps an organization manage uncertainty and control costs. It is a resilient system that can quickly respond to disruptions from transportation delays, labor disputes, natural disasters, unexpected increases in demand and other events. As a result, an appropriate synonym for “supply chain” could be “lifeline” because without a strong supply chain, your business could be on life support. A reliable supply chain can help companies avoid the following four common situations:

  1. “We need parts tomorrow, but the shipment is stuck in customs.”

Many people think of the supply chain mainly in terms of transportation, but it is much more complicated. It is also about managing paperwork, including bills of lading, packing slips and item descriptions. International supply chain management further complicates the picture with each country/trade zone having its own requirements and penalties. In Brazil, for example, a single paperwork error can delay a shipment for days and result in significant fines. In extreme cases, Brazilian authorities might seize the entire shipment and/or ban the exporter.

Any company considering international expansion must include the costs of international trade compliance into financial calculations. A global supply chain simply can't function efficiently without a compliance strategy. Develop country-specific strategies and use experienced logistics professionals who understand the rules and regulations. That keeps shipments flowing smoothly across borders.

  1. “The shelves are empty and I’m losing customers.”

Empty shelves doomed Target's expansion into Canada. In less extreme cases, backorders and shortages can be a double hit to the bottom line. For example, when Apple launched its latest iPhones, people waited eight weeks or more to get one due to supply chain issues. That is deferred revenue, and in some cases, people may have gotten tired of waiting and bought a different phone. Customers don't care about shipping or manufacturing problems. They only see empty shelves. Retail industry surveys show that consumers blame the store for poor planning. If you cannot deliver reliably, the retailer (and customer) will find someone who can.

Supply chain management also includes understanding the culture and customs of the countries where you do business. For instance, companies operating in China deal not only with complex import regulations but also the country's culture and traditions. Take Chinese New Year: in the United States, New Year’s Day is a one-day holiday, but in China the New Year holiday is weeks long. The Los Angeles Times characterized it as “the Chinese equivalent of Christmas, Thanksgiving and the Super Bowl rolled into one. Factories in the world's biggest exporting nation close their doors and workers pile onto buses and trains to head home in the largest annual human migration on Earth. Business and trade grind to a halt.”

Production capacity in the months before the holiday is at a premium because it comes just as retailers are gearing up for the spring and summer seasons. Other Asian countries also observe lunar holidays—Tet in Vietnam and Seollal in South Korea, for example. Experienced companies must build strong relationships with Chinese suppliers to avoid manufacturing delays.

It is also important to have a representative in-country who understands the culture and speaks the language to help companies avoid problems and the costs associated with manufacturing delays, transportation problems and empty shelves.

  1. “We’re so sorry the hard drive failed. Wait a few weeks and we'll repair it.”

Suppose Customer X has products built in Taiwan and imports them to the United States for sale. When problems occur with the products, they collect the broken parts and ship them back to Taiwan for repair. Enlisting the services of a partner who could do the repair in-region, however, would eliminate the added cost of importing and exporting overseas and shorten turnaround times. This is why many third-party logistics providers have regional service centers established in Europe and Asia, and dedicated centers in large trading countries. They can offer diagnostic and repair support, saving individual exporters the cost involved in staffing and stocking dedicated facilities.

  1. “Our cost of goods sold went through the roof last month.”

An unreliable supply chain can be one of the biggest cost drivers for any manufacturer. What happens when a critical part does not arrive on time or the supplier cannot keep up with demand because your forecasts were wrong? In the worst-case scenario, the factory shuts down, but a more common situation is that your cost of goods sold increases.

Keeping production going may mean paying overtime, buying from distributors instead of directly from OEMs, or finding a completely new source with very little leverage to negotiate the best price.

Inventory is a touchy issue in many organizations. Finance pushes for low inventory with parts arriving "just in time," while production prefers to keep more in stock "just in case." Finance generally has the upper hand—unless multiple supply disruptions convince managers otherwise.

A reliable supply chain increases confidence in the system so that companies can increase inventory turns while still meeting production targets. Even the most robust supply chain cannot always respond to big swings in demand, however. Advance forecasting and planning is just as important as supply chain reliability.
Greg Castello is chief financial officer for Flash Global, a provider of supply chain services.