Over my series of articles on this topic, I hope I've provided detailed but easily understandable ways you can diversify (and replicate) your supply sources. I know it may still seem like a daunting task but again, working through the process in a disciplined fashion will ensure your success. In conclusion today, I will describe how to think about the financial justification process and some of the typical questions that you may experience when you actually start diversifying your supply chain. Hopefully, at the end of this article and series, I will have created the motivation to start moving on getting your supply chain diversified.
Let me begin by recapping the primary points of my previous articles in this series. Again, you can read all articles in this series (and other posts) at www.desertsageadvisors.com in the Articles/Blog section. Please feel free to share this article or my website link with anyone you think might benefit from this information.
In Part 1, we discussed how to prioritize your diversification projects so that you will be working on projects that have the greatest impact for your business and your customers. Not every product line will provide the same diversification benefits. In Part 2, I described how to make low volume and slow-growth product lines worthwhile diversification targets. In Part 3, I provided detail on how to reduce the costs of diversifying (and replicating) your product supply sources and production lines. So today, I will share some insight on how to view and think about how you justify the diversification of your supply sources, financially and otherwise.
We discussed previously that focusing on Total Acquisition Cost as compared to just Purchase Price Variance (aka PPV) will provide you a truer picture of your ongoing costs of procuring or manufacturing products from multiple sources. This broader view of acquisition cost can be a tough nut to crack because so many organizations want a simple KPI (key performance indicator) to score their procurement teams on. PPV is simple: it compares the current purchase price or manufacturing costs to the last price/cost you paid. However, that is by no means your total acquisition cost; you have to transport it; you may have to pay duties/tariffs/taxes on the product; your required purchase lot sizes may be huge, thus tying up your cash; your lead-times may be longer, which again ties up your cash. Your cash being tied up is a cost to your business.
This is all to demonstrate the value of using Total Acquisition Cost to evaluate your supply choices. I strongly encourage any organization to spend the time to understand and financially model these total costs - it will lead you to the best financial decision.
Another typical justification barrier is "paying back" whatever investment you may have to make to diversify your supply sources. Many organization are reticent to invest in duplicate tooling, fixtures or machinery unless the investment can "pay back" in a relatively short period of time (1-2 years). This is short term evaluation criteria for a much longer-term benefit scenario. You don't make a diversification move for a benefit just this year - you make this decision to perhaps save short-term cost, but more so to secure your supply chain over the long term - over many years. You make this decision to reduce your lead-times, to give you competitive choices and better satisfy your customer.
These are all improvements in your supply chain that will benefit you over a very long-term horizon. Why not consider your needed investment and pay-back over that longer-term horizon? Over many years executing just these types of decisions, I have never regretted creating diversification in my supply chain. And, with the methods provided in prior articles on how to reduce investment costs, the justification for diversifying and replicating your supply sources becomes much more doable.
Broadly, my message here is to try to avoid the short-term horizon most organizations use to evaluate decisions on diversification (and replication). You're making a decision that will benefit you for a very long time and will most likely benefit your current and potential future customers. Given recent events, I wonder how many organizations wish they would have diversified and had alternative supply source choices today?
As my last topic for today, I will discuss some common questions and obstacles companies hit when actually executing diversification projects.
First topic is answering the simple question of "how to start" when you've identified the alternative source. So to start, you have to ensure you current supply source has provided you the purchase volume flexibility to allow you to channel off some business to your new source, which includes avoiding any volume price penalties. This can all be negotiated with the current supply source. In any event, you should always have purchase agreements that allow you volume ranges that are fairly wide (at the same price or cost) for no other reason than demand can fluctuate organically - you don't want to be obligated to "buy" more input product than you are able to "sell", in the case of lower customer demand.
Should I expect the new supply source to make my expected volume from Day 1? Probably not! In fact, it's always best practice to progressively scale up your demand (and thus their expected supply to you) gradually over some period of months. It's likely a new product to them and it's quite reasonable to expect that they may have some "at rate" issues to work out. Gradually ramping up your new supply source almost always provides you with the safest and least-antagonizing way forward.
Next, do I ramp-up the new supply source and ramp-down the current source in absolute synchronicity? No, it's just a bit too risky to do that. You should ramp-up the new supply source and ensure that they can produce your products at the rate your expect before scaling down your current source. In other words, let you current supply source keep making consistent volumes and consider what they "over produce" as safety stock while you are ramping up the new supply source. This will create a very temporary spike in inventory until you feel comfortable with the new supply source's capability, which you can easily reduce by making small adjustments downward with both supply sources over a multi-month period, once both supply sources are running reliably "at rate".
How do I balance between the two (or more) supply sources over time? The simple answer is through competition. In other words, through re-quoting each supply source every year (or even more frequently) and awarding the share split over the next time horizon. You will always have to award enough business share to keep both supply source at least semi-happy but if you have a growing product line, and even if you keep the share split the same, both sources will continue to grow. I shared before that Apple conducts this re-quoting and share "split" every 90 days. I am not suggesting you should do this every 3 months - that can be very agitating itself - but rather that you should be prepared to reconsider your share split between your supply sources at least once per year, as your business evolves and grows.
These are just a few of the questions and obstacles that are typical in supply chain diversification. If anyone is interested in learning more about obstacles and how to address them, I would be glad to discuss this with anyone personally. Again, you can contact me through www.desertsageadvisors.com.
This concludes my series on Diversifying your Supply Chain. I thank you for reading my articles and I hope at least some of this information proved useful. Myself and my affiliated team at Desert Sage Advisors would be pleased to work with your organization on any aspect of supply chain diversification or a range of other topics. And as always, I welcome your comments and feedback!
To close, over the recent weeks, we've seen the supply of toilet paper and paper towels come back; I can now buy hand sanitizer; I never had any issue finding meat products. Looks like this country's supply chain adapted and responded to the demands of the American public (and under great duress). It's a great example of how you can make your supply chain more resilient and responsive to your customer's needs.
Stay safe, stay energized and PLEASE start moving on your supply chain diversification! Your customers are depending on it.
--- Tom Weikart, Principal Consultant, Desert Sage Advisors