Key Takeaways

• Information drives smart decisions in uncertain times
• Navigating tariffs requires a balance of short- and long-term planning to reduce risk
• Quickly identifying qualified suppliers reduces delays and strengthens supply chain resilience
• Collaborating with partners improves visibility and solutions
• Standardizing processes enables proactive supply chain management and resilience in procurement

Introduction  

The legendary UCLA basketball coach John Wooden once said, “Failing to prepare is preparing to fail.” This adage may be more appropriate in today’s geo-political climate than ever before. The economic trade war centered on tariffs unleashed a new wave of global economic uncertainty. Economists across the globe, including those at some of the largest global banks like JP Morgan, peg the chance of a recession now at 60%.  

Within the first 90 days of the current administration, it has become clear that a new trade policy would try to remake the global trade model of the past 50 years. Tariffs are broadly applied, threatened, or paused on a whim.  

The reality is that no business leader, let alone political leaders, knows whether or not this formula will obtain the desired results. The U.S. rust belt, as the manufacturing centers in the Ohio River valley have been referred to for decades, came about as costs for labor soared, quality declined, and global markets open up.  

The impact, however, can be very real. A range of consultancies and research have estimated the impact from risk and disruptions as:

• Revenue Impact: On average, companies can experience a revenue loss of 6-10% annually due to supply chain disruptions.
•  Margin Impact: Profit margins can also be affected, with disruptions potentially reducing margins by 3-5% for short-term disruptions and up to 30-50% for long-term disruptions

How does this margin erosion occur? Through increased costs from expediting, rush shipping, alternative sourcing, and operational inefficiencies. This may also lead to potentially missed deliveries, underutilized capacity, production delays, inventory shortages, and lost sales opportunities.

Procurement Tactics and Strategies for Uncertain Times

To thrive in these uncertain times, here are some tactics that organizations can follow:

• Be informed

Information represents the central item that separates companies that outperform from those that merely survive or possibly even fail. As we outlined in our prior article, it is best to seek data from multiple sources, utilize tools and methods that refine this raw data into insights and information, evaluate potential outcomes, align to short- and long-term goals, and develop robust strategies. Then act! Measure results, which provides learnings, insights, and new information.

•  Plan and test scenario before making bold moves

Whether manually or with the use of software solutions, organizations can simulate results from planning by testing assumptions, developing scenarios which combine risk and disruption factors before actually executing. This is also a great opportunity to bring internal and external stakeholders into the conversation.

• Create Balance: short-term, mid-term, and long-term

The reality is that no organization can ignore the short-term while addressing the long-term and vice versa. Best practices by leading organizations create a measured approach. Why? Because focusing only on the long-term may jeopardize this investment and because short-term factors derail the company’s ability to implement long-term plans. History is filled with organizations who have failed because of the inability to develop a balanced strategy.

• Engage: Collaborate with customers and key suppliers

Collaboration is a powerful source of information. The extended enterprise offers additional perspectives and mindshare. Tools like Requests for Information (RFI) and Requests for Data (RFD) with supplier partners give you access to valuable information and knowledge of your practices in areas where you lacked visibility.

Additionally, customers deal with many business partners as do suppliers. They may have information on trends, best practices, strengths, weaknesses, opportunities, and threats which should and could influence short-term, mid-term, and long-term strategy.  

Collaboration may strengthen relationships and provide real solutions for addressing risks and disruptions, including tariffs. For example, one of your supplier may have excess capacity and space to preassemble and/or stage materials in a favorable geography. By partnering, your company may be able to avoid or offset tariff impacts. Communicating, collaborating, and strategizing with key partners drives performance.  

• Think before you act

Organizations that find themselves in a panic may react and act before thinking through the potential ramifications and disruptions. They may forget to communicate with employees and business partners, or to map out the pros and cons. The ramifications of such actions, however, may be a longer, deeper disruption than the situation they are attempting to mitigate.  

Consider the fluidity of the current trade policy in the U.S. Imagine a company attempting to mitigate the tariffs on steel by rapidly moving to a supplier that they have not used before. They lack the resources to qualify and develop the new source but decide to issue Purchase Orders to lock in capacity and onshore the castings. While this supplier has operated in adjacent spaces, they have not produced these types of castings before, and the customer has to invest in new patterns as shipping the existing patterns is not feasible given the cost and age. The dominos start to fall, and the company finds itself with higher costs, delayed shipments, and quality misses, to name a few.

• Be proactive and avoid the cycle of crisis management

Many of these best practices focus on the power of information, developing strategy, and executing. Yet, many teams fall victim to the old cliché of “analysis paralysis.” They continually evaluate, assess, collect more data, reanalyze, benchmark, monitor, but do not actually take a proactive approach and balance short- and long-term. The result is the team ends up in a “doom loop” of crisis management, reacting to the latest risk stimulus and scrambling to address. This saps valuable resources from addressing the real root causes of the challenges and leads to under performance, morale and turnover, and other negative impacts.

The Importance of Standardized Processes

We have discussed the power of information, but information alone is not enough. Validated and verified information fed methodically into standardized processes offers organizations the best opportunity to thrive versus merely surviving turbulent times.  

For procurement and supply chain organizations, here are some suggestions. Focus on investing in the team's skills and on core processes. This may be the difference between performance and competitive advantage versus crisis management and underperformance.

• Sales Forecasting, Demand Planning, S&OP

Understanding customer trends, demand requirements, and scheduling of operations sets the stage for the needs that procurement will have to fulfill. This up-front set of processes represents a key to being able to plan to address risks.  

• Category Management & Strategic Sourcing

Profiling the needs and the market represent two key components of these processes. Information including risk elements are key inputs which shape how these teams develop strategy and execute.

• Accounts Payable and Payment Terms

During difficult times, some organizations tackle cashflow by trying to extend payment terms. Shortsighted organizations attempt this without understanding the impact on suppliers or by addressing the variance between Days Payables Outstanding and Days Sales Outstanding (the Accounts Receivable metric). The result may be the acceleration of business risk issues with suppliers who are unable to meet their obligations.  

• Inventory Optimization

In tariff times, many organizations preemptively stock extra materials and products. This may be prudent, but in itself represents risk. Risk stems from the chance of reducing turns, obsolescence, higher carrying costs, and working capital considerations. When organizations have significant money invested in inventory, they do not have money to invest in new equipment, capacity, research and design, dividends, M&A, and other elements that may be related to long-term strategy. Thus, strong materials planning and inventory planning processes are key.  

• Product Lifecycle Management

Look at product and services lifecycle, considering the pros and cons of extending product lifecycles, value analysis/value engineering, obsolescence, and new product introduction. This tariff situation may offer an opportunity to introduce new products (and redesigned supply chains) to upgrade the product portfolio and migrate customers, reducing the impact of tariffs in the process. This demonstrates the role of longer-term strategy.

• Continuous Improvement

History proves that organizations that embody a strong continuous improvement culture with sound processes for their Plan, Do, Check, and Act cycle create long-term value. Again, central to this process is the leveraging of information to impact the organization in addressing real root causes of performance misses or risk factors. Exposing these elements allows the organization to be better informed and drive balanced improvements.

• Measure Results

Measure results to understand the impact your strategies are having on revenue preservation and growth, profit preservation and growth, customer retention and satisfaction, employee retention, and more.  

Where Can Avetta Support Value Creation?

We know risk is everywhere. Disruptions are constant. These factors compound and exist at multiple tiers of the supply chain, and performance is predicated on strong supply chains. The key theme outlined in this article is the power of information. Information represents the central element to preparation, strategy, execution, and continuous improvement.  

Solutions like Avetta, which provide validated and verified information related to key areas such as risk, health & safety, compliance, cybersecurity, and ESG fuel skilled teams and capable processes in addressing challenges and opportunities. Information provides the foundation for developing robust, balanced actions that address near-term and long-term goals and objectives. For procurement organizations using Avetta, the ability to rapidly identify qualified suppliers and contractors allows them to not only reduce the cycle time for sourcing but also reduce the time to onboard new suppliers, leading to value realization sooner.  

In thinking back to Coach Wooden’s famous quote, ask yourself: will we be prepared with the right people, processes, tools, empowered with information, to make balanced, strategic decisions that design performance into the supply chain? For procurement teams looking to navigate risk and disruptions, it’s time to prepare.  

Avetta’s powerful solution helps procurement organizations navigate turbulent times and feel prepared for whatever disruptions are thrown their way.  

Visit Avetta.com to learn more about out supplier prequalification solutions.