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Protecting your business in an environment of change

From political campaigns to the shifting economy to adjustments in manufacturing strategy necessitated by a weakening dollar and higher energy costs, waves of change are lapping at our door. And once again, companies find themselves in a period of uncertainty.

As operations and supply chain professionals, there are many actions you can take to help your company weather the current environment.

Here are three key steps you should take to protect your business from the winds of change:

1. Review your liability triggers in your supply contracts.

This is a good time to pull important contracts out of the filing cabinet and determine what risks the changing landscape might present. Focus on your key supply contracts and look for four key issues.

First, determine what triggers your liability. Is it forecasts, purchase orders, Kanban releases, min-max stocking levels or system parameters like safety stock? Look to see if you need to make adjustments.

Next, determine what type of flexibility you have built into the contract and determine what additional liability this might create for you. For example, you might have a 20% upside built into the contract and the supplier is allowed to plan materials and capacity to that upper bound. You should review those numbers and ensure the levels are appropriate for your current business.

The next item to check is specificity. Ideally, your contracts would have been written so it is clear as to which parts/products you are liable for and which you are not. You’re typically stuck with custom parts, but everything else is negotiable. If you do not have this language already, then you are even more dependent on the process for identifying and mitigating inventory liability.

Finally, make sure the process is clear. There is less ambiguity and risk if your contract sets expectations about the timing for reporting inventory liability (the shorter the better) and clearly outlines steps your supplier must take to reduce your liability. This might include moving raw materials back to their supplier, moving it to another internal program, reworking it, etc. Even if you do not have this type of language in your contract, set expectations with your supplier about how you would like to handle these situations. If your contract is unclear about timing and required action, you should spend more time micromanaging these issues.

2. Be proactive in managing your inventory exposure.

Inventory exposure is a way to measure the time and dollar elements of a supply chain. The idea is to identify hot spots and deal with risk before it shows up in the form of excess or obsolete inventory. At a high level, you get exposure by rolling together cumulative lead-time, volumes, and prices. We have found this to be the most meaningful at the product or product-family level.

Start by reviewing your most important products. Look for products and components with the highest exposure. Use techniques such as last-minute differentiation (or postponement), low-cost buffers, reduced transformation time, customer lead-times, etc. to take out large chunks of exposure. By reducing exposure, you take money out of the supply chain and limit the amount of liability you may face in a changing environment.

3. Keep your suppliers in the loop. 

Timely information becomes more important as your environment becomes less stable and less predictable. In normal environments, you might be happy to give your forecast to your next level supplier and assume that the information will make its way down the supply chain. But distortion and critical time delays are likely, and you will be better served if you directly inform all of your key suppliers in parallel. Identify your top 10-20 suppliers and make a point to share forecasts, forecast trends, and key business leverage points that may affect your demand positively or negatively. Ask for feedback on how well your direct forecast aligns with the information that is coming through the normal supply chain. In trying to reduce their own risk, certain players in your supply chain might start discounting your forecasts and sending a more conservative message to their suppliers. This might limit your ability to respond to important revenue opportunities.

In a period of changing economic conditions, the victory goes to those that are best prepared. You can help your company by addressing a few pivotal areas and taking proactive steps to reduce risks. Your window of opportunity is narrow and your ability to institute effective countermeasures depends on taking action now, rather than waiting for a crisis to occur.