Sharing the pain of Brexit cost inflation
CEOs increasingly look to their supply chain organisations to work miracles in pursuit of customer service excellence. But sometimes they also make public commitments that prove to be ill advised and unsustainable.
A case in point is the UK food and clothing retailer Marks & Spencer. Back in November, its CEO, Steve Rowe, promised to shield shoppers from any price rises caused by the fall in sterling since the Brexit referendum in June 2016.
But on New Year’s Day, The Sunday Times reported that M&S had been forced to back down and agree to pay some of its grocery suppliers up to 15% more for food and drink items.
According to the newspaper, smaller own-label suppliers were angered by the company’s refusal to negotiate with them on price increases – triggered by a 17% fall in the pound’s value against the dollar and an 11% fall against the euro since the Brexit vote – and had threatened to stop deliveries.
This was the second public spat over pricing between a major British retailer and its suppliers in recent months. In October, Tesco and Unilever locked horns dramatically, if briefly, over the latter’s demand for a 10% price increase on its products, which include Marmite and Wall’s ice cream.
It certainly won’t be the last. Indeed, 2017 is shaping up to be a year in which British companies and their customers are forced to share the pain of higher costs.
Manufacturing costs rise
The sterling’s depreciation has helped exporters and spurred a surprisingly robust performance by the British economy in the second half of last year. But it has also pushed up the price of imported raw materials.
The latest Markit/CIPS UK Manufacturing PMI, which surveys purchasing executives in more than 600 industrial firms, showed the eighth consecutive month of rising input prices, with the rate of inflation among the highest in its 25-year history. The official UK Producer Price Index tells a similar story. In the year to November 2016, input costs rose by 12.9% overall. Petroleum products, chemicals, metals, textiles and food ingredients were among the biggest risers.
Prices charged by UK-based manufacturers increased by a more modest 2.3% – the highest rate in the industrialised world after Belgium and Sweden – but like raw material costs these have continued their upward trajectory.
Picking up the tab
Some retailers and manufacturers have been able to mitigate the effect of sterling’s fall through currency hedging. But the financial markets can only take so much of the strain for so long.
Asking consumers to pay more is another option. In October, Apple raised its UK prices for iPads and Mac computers by 5-25%. Tesla is also due to increase its UK car prices by 5%. But many firms simply don’t enjoy this degree of pricing power.
Big retailers like M&S and Tesco are especially reluctant to raise prices. We’ve got used to, and been conditioned to believe, that they move in only one direction. Down.
That leaves companies to battle it out with their suppliers as to who shoulders the increased costs and how much their respective profit margins are squeezed. This can be an ugly (if usually unseen) spectacle.
What price cost transparency?
A major problem for most firms when faced with a supplier insisting on a price increase is that they lack visibility of its cost structure, and hence aren’t in a position to assess whether the demand is reasonable or opportunistic.
In my conversations with SCM World community members, I’ve noted a growing interest in should-cost modelling techniques in the past year. These have been used in sectors like automotive for some time, but are now being more widely adopted.
When building a cost model, it’s possible to go so far using publicly available information, internal analysis and best estimates. However, to do the job properly you really need the supplier to share detailed data on material costs, labour rates, overheads and other cost components.
And that level of transparency requires trust.
A good example of this can be seen at tier-1 auto supplier Nexteer, which uses should-cost modelling as part of its strategic supplier relationship management initiative.
Unlike some players in its industry, Nexteer doesn’t seek to dictate the profit suppliers can make, but focuses instead on how key cost drivers can be influenced, including through joint development activities.
When CEOs at companies with this philosophy of doing business with suppliers and these tools in their toolbox promise to shield customers from unwanted price rises, they at least have something more substantive to offer than the mere hope that their supply base will take the hit.
UK retailers and others facing Brexit’s political and economic fallout should take note.
By Geraint John, SVP Research, SCM World
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NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”