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Supply Chain Risk Survey Nov 2012

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Steve_Rosvold

The document summarizes the results of a supply chain risk survey of 30 manufacturing, assembly, and distribution companies in SW Washington and Portland, OR. The top issues identified were: 1) key inputs like materials, energy, and transportation making up over 50% of costs on average, and 2) price volatility of these inputs significantly impacting most companies. The document provides suggestions for addressing these issues, such as including price risk management in core management systems and implementing hedging strategies. It also cautions against focusing solely on low costs and emphasizes managing margins instead.

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November 24, 2012 Supply Chain Risk Survey Results Highlights Price Volatility and Margin Compression Concerns Recently, 30 manufacturing, assembly and distribution companies in the SW Washington/Portland, OR area participated in a Supply Chain Risk Survey. The purpose of the survey was threefold. First, to share what is changing for local companies in terms supply chain risk, especially price risk around raw materials, energy and transportation. Second, to summarize what companies are doing to manage their supply chain risk and business costs. Third, to inspire critical thinking around how to improve the management of your supply chain, especially the price risk on your key inputs. Below is a list of the top issues identified by the survey participants and solutions that will help combat the issues. 1. Key Inputs, defined as raw materials, energy and transportation, make up a growing portion of company expenses; on average exceeding 50% of total costs. Nearly all survey part- icipants agreed effective management of these costs is critical to the financial success of their business. How can these costs be effectively managed? By framing this question as effective margin management rather than obtaining the lowest Key Input price you will improve your results. Page |1 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com
November 24, 2012 Negotiations that emphasize obtaining the lowest price can lead to irrational behavior; like guaranteed minimum quantities, inventory buildup, bad payment terms and fixed prices. Too frequently, todays low input price turns into next months or next quarters high input price. Turn your attention to margin management not low cost. You may miss out on the fortuitous home run but you will always be in the game. 2. The price volatility of Key Inputs has had significant impact on most companies over the past two years. For those companies that werent impacted significantly, operational improvements were made that may have camouflaged the impact of volatile prices. What can be done to manage the financial impact of increasing price volatility of key inputs? Include price risk management in your core management system. Minimally this includes com- municating the companys philos- ophy on price risk, price risk tolerance levels and putting in place a price risk measurement system. 3. Most companies plan to combat rising and volatile Key Input pricing with operational or supply chain improvements. This is a positive step toward improving profitability but has little to do with directly managing the issues caused by rising and volatile Key Input prices. Page |2 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com
November 24, 2012 What else can be done? Implement a hedging strategy that fits your business size and complexity. Hedging is an action that reduces the financial impact due to changing prices. 4. Over 70% of Survey participants rely heavily on vendors to manage the price risk of their Key Input. What are other alternatives to having the fox guarding the henhouse? All significant inputs should be competitively bid at reasonable time intervals. Recently two companies I worked with put out bids that maintained multiple suppliers in their supply chain but granted a greater % of their business to the vendor with the best package (not solely based on price). Learning the main drivers behind Key Input costs will allow a company to set up models that monitor price movements to their underlying derivative. This knowledge can be used to improve contract pricing methods with suppliers or to work with third parties to develop price risk mitigation tools. Page |3 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com
November 24, 2012 5. Top line growth and cost containment are the top business priorities over the next 12 months, overshadowing longer term, capital intensive activities like research and development, launching new products or services and investing in infrastructure. Survey participants indicated this short term focus is related to the current uncertainty in their markets and the economy in general. How can we stay focused on long term business needs when the short term is so uncertain? Innovation, new ideas and a skilled workforce are still necessary for long term survival. Highlighting to employees and stakeholders that these activities and skills are still very important to the business is crucial, even if the funds or time arent immediately available to act on them. One local company is temporarily applying the skills of its R&D staff to more short term issues, searching for more creative solutions than they would expect from their normal process. Companies in Washington and Oregon can tap into their states Shared-Work program to retain their skilled employee base through business slowdowns that normally would result in lay-offs. 6. A majority of the businesses included in the survey have widespread supply chains and a customer base that reaches well beyond our local area. We have limited resources to manage complex supply chain issues. Where can we go for expert advice? Its easy to miss what is right under our nose. We have some very talented manufacturing professionals in our area. Many of them participated in this Supply Chain Risk Survey and would be great resources to help solve complex supply chain issues. 7. Businesses are not confident they can control Key Input costs in 2013. They are relatively confident they will meet their budgets or 12 month forecasts for personnel costs, technology, financing/insurance and other SG&A expenses. Page |4 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com
November 24, 2012 What can we do to control Key Input costs for 2013? First, lets define control as maintaining a price relationship between our Key Inputs the price of our outputs. This is very different than simply preventing Key Input costs from going up. Focus on maintaining a gross margin, not on low cost. Having a risk management system that incorporates Key Input costs, a hedging strategy that reduces the business risk resulting from price changes and a margin management process that provides transparency to current and future margins allows a business to control the impact Key Input cost changes have on earnings. 8. Although companies are worried about not being able to control raw material costs, they believe raw material costs have the most significant opportunity for cost reduction in 2013, more than double the 2nd biggest cost saving opportunity, direct labor. . Page |5 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com
November 24, 2012 What can we do to capture cost reductions on raw materials? A word of caution regarding this issue - When implementing a Key Input cost reduction plan be careful to ensure the savings outweigh any increase risk you are incurring. Some of the potential increased risks are listed under 1 above. Some solutions in this area may come from your local peer group, individuals who participated in the Supply Chain Risk Survey. Many of the top issues you are facing are also the top issues they are facing. 9. More than 80% of respondent companies plan to launch some type of key cost initiative in 2013 How do we know we are attacking the cost areas that will have the most impact for us? Dont simply take your largest costs and start whittling away. Two key considerations should be analyzed before embarking on a significant cost initiative: What is the return on investment for the initiative? Small, simple and inexpensive initiatives may yield better returns than large, complex and expensive ones even though the former may be targeted at smaller dollar cost items. Are there dependencies across cost categories that can leverage the effort or prevent an effort from realizing its expected benefit? For example. Locking in long term pricing for a raw material at a 5% discount may look good up front but if your product pricing declines by 5% during the contract period your margins will shrink. If you are interested in discussing any of these solutions or concepts further please contact me. Regards, Steve Steve Rosvold 360.695.8605 Office 360.606.7592 Cell Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com http://www.linkedin.com/in/steverosvold Page |6 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com

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Supply Chain Risk Survey Nov 2012

  • 1. November 24, 2012 Supply Chain Risk Survey Results Highlights Price Volatility and Margin Compression Concerns Recently, 30 manufacturing, assembly and distribution companies in the SW Washington/Portland, OR area participated in a Supply Chain Risk Survey. The purpose of the survey was threefold. First, to share what is changing for local companies in terms supply chain risk, especially price risk around raw materials, energy and transportation. Second, to summarize what companies are doing to manage their supply chain risk and business costs. Third, to inspire critical thinking around how to improve the management of your supply chain, especially the price risk on your key inputs. Below is a list of the top issues identified by the survey participants and solutions that will help combat the issues. 1. Key Inputs, defined as raw materials, energy and transportation, make up a growing portion of company expenses; on average exceeding 50% of total costs. Nearly all survey part- icipants agreed effective management of these costs is critical to the financial success of their business. How can these costs be effectively managed? By framing this question as effective margin management rather than obtaining the lowest Key Input price you will improve your results. Page |1 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com
  • 2. November 24, 2012 Negotiations that emphasize obtaining the lowest price can lead to irrational behavior; like guaranteed minimum quantities, inventory buildup, bad payment terms and fixed prices. Too frequently, todays low input price turns into next months or next quarters high input price. Turn your attention to margin management not low cost. You may miss out on the fortuitous home run but you will always be in the game. 2. The price volatility of Key Inputs has had significant impact on most companies over the past two years. For those companies that werent impacted significantly, operational improvements were made that may have camouflaged the impact of volatile prices. What can be done to manage the financial impact of increasing price volatility of key inputs? Include price risk management in your core management system. Minimally this includes com- municating the companys philos- ophy on price risk, price risk tolerance levels and putting in place a price risk measurement system. 3. Most companies plan to combat rising and volatile Key Input pricing with operational or supply chain improvements. This is a positive step toward improving profitability but has little to do with directly managing the issues caused by rising and volatile Key Input prices. Page |2 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com
  • 3. November 24, 2012 What else can be done? Implement a hedging strategy that fits your business size and complexity. Hedging is an action that reduces the financial impact due to changing prices. 4. Over 70% of Survey participants rely heavily on vendors to manage the price risk of their Key Input. What are other alternatives to having the fox guarding the henhouse? All significant inputs should be competitively bid at reasonable time intervals. Recently two companies I worked with put out bids that maintained multiple suppliers in their supply chain but granted a greater % of their business to the vendor with the best package (not solely based on price). Learning the main drivers behind Key Input costs will allow a company to set up models that monitor price movements to their underlying derivative. This knowledge can be used to improve contract pricing methods with suppliers or to work with third parties to develop price risk mitigation tools. Page |3 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com
  • 4. November 24, 2012 5. Top line growth and cost containment are the top business priorities over the next 12 months, overshadowing longer term, capital intensive activities like research and development, launching new products or services and investing in infrastructure. Survey participants indicated this short term focus is related to the current uncertainty in their markets and the economy in general. How can we stay focused on long term business needs when the short term is so uncertain? Innovation, new ideas and a skilled workforce are still necessary for long term survival. Highlighting to employees and stakeholders that these activities and skills are still very important to the business is crucial, even if the funds or time arent immediately available to act on them. One local company is temporarily applying the skills of its R&D staff to more short term issues, searching for more creative solutions than they would expect from their normal process. Companies in Washington and Oregon can tap into their states Shared-Work program to retain their skilled employee base through business slowdowns that normally would result in lay-offs. 6. A majority of the businesses included in the survey have widespread supply chains and a customer base that reaches well beyond our local area. We have limited resources to manage complex supply chain issues. Where can we go for expert advice? Its easy to miss what is right under our nose. We have some very talented manufacturing professionals in our area. Many of them participated in this Supply Chain Risk Survey and would be great resources to help solve complex supply chain issues. 7. Businesses are not confident they can control Key Input costs in 2013. They are relatively confident they will meet their budgets or 12 month forecasts for personnel costs, technology, financing/insurance and other SG&A expenses. Page |4 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com
  • 5. November 24, 2012 What can we do to control Key Input costs for 2013? First, lets define control as maintaining a price relationship between our Key Inputs the price of our outputs. This is very different than simply preventing Key Input costs from going up. Focus on maintaining a gross margin, not on low cost. Having a risk management system that incorporates Key Input costs, a hedging strategy that reduces the business risk resulting from price changes and a margin management process that provides transparency to current and future margins allows a business to control the impact Key Input cost changes have on earnings. 8. Although companies are worried about not being able to control raw material costs, they believe raw material costs have the most significant opportunity for cost reduction in 2013, more than double the 2nd biggest cost saving opportunity, direct labor. . Page |5 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com
  • 6. November 24, 2012 What can we do to capture cost reductions on raw materials? A word of caution regarding this issue - When implementing a Key Input cost reduction plan be careful to ensure the savings outweigh any increase risk you are incurring. Some of the potential increased risks are listed under 1 above. Some solutions in this area may come from your local peer group, individuals who participated in the Supply Chain Risk Survey. Many of the top issues you are facing are also the top issues they are facing. 9. More than 80% of respondent companies plan to launch some type of key cost initiative in 2013 How do we know we are attacking the cost areas that will have the most impact for us? Dont simply take your largest costs and start whittling away. Two key considerations should be analyzed before embarking on a significant cost initiative: What is the return on investment for the initiative? Small, simple and inexpensive initiatives may yield better returns than large, complex and expensive ones even though the former may be targeted at smaller dollar cost items. Are there dependencies across cost categories that can leverage the effort or prevent an effort from realizing its expected benefit? For example. Locking in long term pricing for a raw material at a 5% discount may look good up front but if your product pricing declines by 5% during the contract period your margins will shrink. If you are interested in discussing any of these solutions or concepts further please contact me. Regards, Steve Steve Rosvold 360.695.8605 Office 360.606.7592 Cell Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com http://www.linkedin.com/in/steverosvold Page |6 Office:(360) 695-8605 Cell: (360) 606-7592 Steve@KRMBusinessSolutions.com www.KRMBusinessSolutions.com