Nick Harrison is a partner at top-20 management consultancy, Vendigital.
During the pandemic, it became clear that traditional modelling techniques could no longer be relied upon to predict levels of demand, and many businesses experienced unprecedented operational disruption. Skills shortages, cost inflation and geopolitical risk have also risen up the management agenda. So, how can organisations adapt their operations to a climate of demand uncertainty?
Over the last two years, many different areas of UK industry have faced significant supply chain shocks. For example, after a prolonged lull in production, aerospace giant, Airbus, saw demand for its A320 and A350 aircraft increase almost overnight, requiring production processes across the supply chain to rapidly ramp up.
For many businesses, the difficulty involved in meeting this bounceback in demand has been exacerbated by gaps in skills and capability. With many people rethinking their priorities during the pandemic, some individuals have opted to pursue new career paths or enter into early retirement. Challenges around key employees being absent due to COVID-19 and difficulties in delivering training to the workforce have also meant that some organisations lack the expertise needed to respond to fast-changing levels of demand for products and services. These factors have created a perfect storm for businesses, which often lack experience from similar scenarios to guide their decision making.
Soaring shipping costs, heightened by inflationary pressures, are also requiring businesses to review and reconfigure their global supply networks. Ongoing outbreaks of COVID-19 in some overseas markets are also causing supply shortages, making it challenging for businesses to fulfil customer deliveries. For example, the strict lockdown in Shanghai, China in recent weeks has led to widespread marine congestion of ships and vessels around the city’s port. As a result of such breaks in global supply, many organisations are considering switching to more local supply chains. This can involve applying techniques such as right-shoring, where a business’ manufacturing operations are located in countries that provide the best combination of cost and efficiency.
In order to mitigate this supply chain disruption, it’s vital that businesses explore ways to improve efficiency when transporting goods; in particular, considering how they can fill shipping containers to minimise the volume of unused space. This involves going back to basics and rethinking how components are engineered and assembled. For example, by considering how to stack parts more efficiently, a manufacturer of seats for the automotive industry could realistically achieve a 100 per cent reduction in unused space within its shipping containers. Alternatively, certain parts and components could be flat-packed, rather than transported pre-assembled.
While businesses may not be able to control inflationary pressures, they can mitigate any negative impacts on their financial position by adopting a holistic approach to cost reduction, taking into account all areas of their operations. For example, cost engineering, which involves applying a forensic approach to reducing the costs involved in a product’s manufacturing processes, can help manufacturers to achieve greater cost efficiency. Can a component be removed from the manufacturing process or substituted for a less expensive version, while still meeting the customer’s product specification?
Decision makers should also carefully review the terms of their long-term supplier agreements and collaborate closely with procurement partners to improve payment terms where possible, realising cost reduction opportunities. Rather than looking 18 months ahead, businesses should aim to lock in any cost savings over a three to five-year period.
While global supply chains have always had to cope with peaks and troughs in demand, the pandemic’s effect and soaring shipping costs are causing demand uncertainty on a scale never seen before. By seizing the opportunity to drive cost savings across the supply chain, decision makers can switch from a tactical approach to a strategic one and strengthen their operations in the face of future challenges.