by Caroline Macleod
SAP Digital Supply Chain. Understanding the Impact of Supply Chain Uncertainty on Profitability
As an SAP Digital Supply Chain consulting and implementation partner, on a daily basis at Rocket we harness our SAP expertise to help combat the growing number of complex and increasingly interconnected economic challenges facing global customers across consumer packaged goods (CPG), life science and manufacturing sectors. From climate change, environmental degradation, increasing regulatory pressure and slowing global growth, against a backdrop of political and economic tension are, already, impacting the performance of business supply chains.
With pricing pressures, raw material availability, counterfeits and disruptive new agile businesses entering the market, organisations have the perpetual challenge of trying to manage unpredictable demand within the supply chain from both a consumer and regulatory perspective, in addition to the increasing expectation for additional value added services from customers.
From a cost reduction and growth perspective, when you start to consider the impact of uncertainty within your supply chain on profitability, failing to mitigate uncertainty will, without a doubt, introduce risk to performance, including;
- Poor product availability.
- Poor customer service leading to loss of market share.
- Low resilience and low response.
- Reduced financial performance.
There are many ways uncertainty can be managed. Below we look at two different ways this can be achieved.
Increase inventory levels
We can hedge against it, building buffers into our supply chain, typically in the form of additional inventory. If you see a spike in demand that wasn’t planned, or a delay due to material shortage or the manufacturer being unable to supply on time, the buffers help protect the business.
This is a common response to uncertainty adopted by many businesses, particularly when there isn’t the capability to do anything else. It can deliver the target customer service levels (OTIF), but it has many knock-on cost implications to profitability, over and above the obvious cost of the capital invested in the inventory.
This scenario creates:
- Good product availability/customer service, but high operating costs leading to reduced profitability.
- High resilience, but low response to uncertainty.
The advanced model that delivers the highest profitability
The more effective scenario is to create a supply chain that can meet desired customer service levels, for example on time/in full (OTIF), at the minimum cost-to-serve, thereby delivering the highest profitability.
This scenario creates:
- Good product availability/customer service and high profitability.
- High resilience and fast response to uncertainty.
In order to achieve this, businesses need to start moving the dial on performance across the supply chain, with finance operations helping lead the way, whether that be within the supply chain design, planning, execution or, ideally, the alignment of these three together.
Creating responsiveness to unexpected situations is the key to delivering on your promises to the customer whilst meeting your promises to your shareholders. This change does require a shift in working practices and the underlying tools and visibility to enable and manage effectively, providing the CFO (Chief Financial Officer) with:
- The opportunity to make informed, pro-active decisions relating to supply chain investment and execution quickly.
- The confidence to communicate the information and implications.
- The ability to shape, lead and measure strategic direction.
- To help the overall business perform better.
- To create a strategic culture based around financial gain, growth and sustainability.
Our CFO series looks at the impact of supply chain uncertainty on financial performance and profitability, download our free eBook to explore 5 key risk to your business performance arising from within the supply chain.