The Myth Of Supply Chain Management

The Myth Of Supply Chain Management

In addition to cutting costs, managers should prioritize preserving the flexibility and resilience of their supply chains.

Corporations can also be viewed as “cost-takers,” helpless to change the cost of their supply chain, in the same way, that economists assert that companies are frequently “price-takers” at the mercy of using current market prices for their products.

The volume of transactions required by the supply chain for a single coil of aluminum, for instance, dropped off at the loading dock of a beverage maker for packaging, was so great that the manufacturer’s knowledge of the metal’s creation was negligible. Even businesses with sizable market shares and superior understanding of their tier 1 and 2 suppliers are typically unaware of what occurs before supplies arrive at their door.

Supply chain managers should be first focused on resiliency.

It is not always the goal of supply chain management to reduce costs. Additionally, it is not always the goal to control as many suppliers as possible by keeping an eye on their activities and exerting influence over them. As a result, it is impractical and expensive to use the traditional notion of supply chain visibility, which for many people refers to clearly mapping out as many interactions upstream as feasible.

Instead, supply chain management’s main responsibility is to constantly work to improve the company’s supply base in order to make it more resilient to unexpected macroeconomic, geopolitical, and sector-specific shocks. In actuality, this entails choosing regions and supplier markets that will best guarantee supply.

Additionally, their main goal when it comes to fostering operational resilience is to increase supply elasticities across crucial raw material markets. The objective is to source from markets where new providers can step in swiftly to clean up the damage when there is a supply disruption.

If not, expenses will rise, businesses will have to pay current suppliers more, and they frequently will have to pay to maintain end-product prices at the same level to maintain market share in the interim.

To put it another way, if a company’s network is not properly designed, the price elasticity of demand for its own products will greatly exceed the price elasticity of the suppliers for those products. Prices are frequently more important to customers than to suppliers.

As a result, there is an “elasticity mismatch,” of which supply chain management is only one, but probably the most crucial, factor. Therefore, when developing a plan, supply chain managers should pay close attention to the features of the company’s supplier marketplaces first and then concentrate on sourcing from the most aggressive vendors within those regions.

For better or worse, understanding the supplier market is a combination of art and science. Regression models can be used to determine and map elasticities across important marketplaces in cases when there is a wealth of data. Where strong data is lacking, we can draw logical conclusions by looking at qualitative patterns, overall country market structures, and relative changes in nearby markets.

Many details about the supplier markets within a supply chain network, including their diverse regulatory environments, trade obstacles, infrastructures, geographic positions, and more, are condensed into a single “supply elasticity” statistic.

These measurements reflect the characteristics of all upstream marketplaces, not only tier 1 and 2 providers, which is perhaps most significant. The magnitudes of each level of supplier’s direct contributions to the materials that need to be sourced are implicitly weighted.

Elasticity mismatches extend beyond prices.

Price is simply one of a vast array of factors that influence the decisions made by businesses regarding which products to buy and sell. These decisions are increasingly influenced by social effect factors, company reputation factors, and even political factors. Similar methods can be applied in this situation to figure out, for instance, how quickly a nation or industry’s suppliers will be motivated to address environmental issues – or, as we would say, what its “environment, social, and governance (ESG) elasticity of supply” is.

Companies can better understand their degrees of resistance to external shocks by evaluating elasticities and, most immediately, price elasticities of supply. Supply chain and finance teams may seek to rearrange supply networks or diversify their portfolios if supply elasticity is much lower than demand elasticity, relative to an industry average, for many major items.

The target outcomes? One is to simply highlight significant potential supply chain network flaws, and another is to provide guidance for repurchasing efforts. These measurements can allow sensitivity assessments that are arranged around several categories of supply chain disruptions in a more sophisticated application. Beyond these applications, the possibilities appear limitless.

The largest supply chain network wins for major multinational corporations. Therefore, in our opinion, the supply chain management team with the finest market knowledge prevails. Study first. Put off the haggling and arm-twisting until later.