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Mitigate Direct Materials Risk in an Uncertain Market

Cost savings, production efficiencies, speed, skilled labor, expertise, and specialty materials — just a few of the many reasons why global supply chains are central and critical to the business and product success of most major brands. However, the rewards don’t come easy. Relying on raw material suppliers, manufacturers, and contractors from around the world introduces myriad risks, starting with complexity.

Everything from design to delivery is affected. Every supplier in the chain represents potential operational, financial, regulatory, and product quality and safety risks. Global forces like geopolitical strife, tax and tariff maneuvers, natural disasters, and far-reaching legislation (e.g., GDPR and climate agreements) shift the risk landscape, often producing cascading impacts through the supply chain. And the primary enterprise shoulders most of the risk burden.

As reliance on third parties grows both broader and more entrenched, these enterprises need to develop streamlined, flexible, and highly effective mechanisms for control and visibility throughout the product life cycle. The current uncertainty surrounding tariffs and trade disruption highlights the need for stronger risk management capabilities, especially when it comes to sourcing direct materials. Risks related to sourcing and procuring direct materials should be assessed and managed at every stage of the product lifecycle, beginning with design and following through to quality assurance, packaging, and delivery.

For example, in light of steel and aluminum tariffs and U.S. supply shortages, product designers must ensure that any specialty component made of those metals is readily available from domestic suppliers or multiple foreign sources — and if not, they may discover that their design will be too expensive to produce, sending them back to the drawing board early in the process. Engineers may need to assess the viability of using alternate materials or components in current products for the same reasons. 

Finally, what happens if replacement parts for maintaining and repairing existing products become hard to obtain, or too expensive? Service departments need to know this information in enough time to develop workarounds, and in some cases, inability to obtain parts may force a product redesign. The speed, efficiency, intelligence, and automation of direct materials sourcing systems are critical to adapting to scarcity, price increases, and alternate plans before customers are negatively affected and start looking elsewhere.

Having a collaborative and connected ecosystem is important. For example, sharing your forecasted needs with a supplier and collaborating digitally on capacity, lead times and quantity, gives you more agility and control and helps to secure your supply chain requirements. 

The following represent broad categories of direct materials risks to consider: 

  • Barriers to introducing new products (NPI) are relatively low.  NPI has never been easy, and now the potential for proliferating competitors and market disruption is bigger. All you need is an idea and a manufacturer. For established companies, that means they need to keep generating ideas and keep building relationships with innovative, talented suppliers.  Which relates directly to the next risk…
  • Your suppliers could be holding you back.  Are your suppliers innovative? Are they helping you elevate your products and strategies with creativity and problem solving capabilities? If they aren’t flexible enough to adapt quickly to customer demands, they won’t be able to help you keep up in a consumer-driven market. Companies that rely on supply chains do not have complete control over their competitive stance, so make sure your suppliers are in it to win it as your partner, and find ways to systematically encourage and reward innovation.
  • Quality is still job number one.  Consumer trends are moving towards more complex products that include “smart” functions and connectivity. Complexity inherently introduces risk, and software and computing components require more testing to ensure they work as advertised in a wide variety of environments. Connected products also have to meet standards for protecting cyber security and consumer data privacy. Quality control is particularly problematic when final products are shipped directly from a third party manufacturer. It is the primary brand that takes the hit when flawed products are released into the market, even if the supplier is entirely at fault. This risk is, of course, urgently critical for companies making products with potential safety implications, including everything from vehicles to medical devices to food and beverage.
  • The reliance on supply chains is deepening in many sectors.  The auto industry, for example, is shifting toward a model wherein suppliers provide entire sub-assemblies, not just individual parts. Risks increase in this model — if a sizable subsystem of the final product (e.g., the steering assembly in a car) does not meet quality standards, it will be more work to investigate and remedy the root cause. Replacing suppliers for individual parts is much easier than replacing suppliers for entire systems.
  • Brands are losing the ability to make things themselves.  The reliance on third parties naturally shifts the core competencies of the primary enterprise. If you depend on overseas suppliers for every part of the product lifecycle except idea conception, design, and customer service, you are more vulnerable to major disruptive events (war, famine, trade embargos, etc.) and need to carefully consider the risk of moving entirely away from domestic production capabilities.

Relationship development and collaborative infrastructure are increasingly important to building agile supply chains. To increase visibility and control, information and insights between brand and supplier must be free flowing, centrally organized, and readily captured for analytics and business intelligence systems. The ability to peer into the future through the eyes of your suppliers is vital to sustaining the extended enterprise in the face of constant uncertainty, shifting regulations, and direct materials disruption.

Likewise, the ability to quickly find and onboard alternate suppliers — or to diversify suppliers across regions — is key to mitigating risk. Cultivating this ability is no small task and requires comprehensive digital procurement systems. Modern supply chains are fine-tuned, intricate-yet-massive machines. The technology platforms that support and feed them have to measure up by enabling process automation, predictive analytics, and robust master data management.

In the end, risk management isn’t just about avoiding calamity. Rather, it’s about being in the position to grab the golden ring of opportunity while spinning at top speed. 

 

In the current dynamic global business environment, there’s little room for hesitation, drawn out decision-making cycles, or blindly sticking with what has always worked. Product success starts with direct materials, so make sure your risk management efforts start there, too.

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