To revive slowing economic growth, the Finance Minister of India made an important announcement on September 20, 2019: a reduction in the base corporation tax rate to 22% for existing companies and to 15% for new manufacturing companies. This is sure to give a boost to manufacturing companies in India, all of whom are dependent on supply chains.
Now would be a fortuitous time for Indian manufacturers to improve their supply chains to cut costs and improve margins.
Here are some ways in which reviewing your supply chain can help your business:
- Save you money, boosts profits and keeps your prices competitive
- Facilitate the sourcing and receipt of raw materials and components your business needs
- Ensure the smooth delivery of high-quality finished products to customers
- Offer real-time insight into inventory levels, revealing problems for quick resolution
Supply chain monitoring also includes product development, marketing, sales and order processing — all critical components of any manufacturing business. Inefficiencies at any stage can cause your business to squander money, time and human resources.
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How global companies manage their supply chains
As manufacturers grow and introduce new products, their supply chains can grow complex. With thousands of entities in the supply chain, it is difficult to keep track of the deliveries of all suppliers or distributors.
A disruption in the operations of even one primary supplier could damage a manufacturer’s business. That’s why it is necessary to do a periodic audit to improve your supply chain, just as a business does an audit of its finances.
Case study: Airbus
Aircraft manufacturer Airbus has a global supply chain. The different parts of its airplanes are manufactured in different EU nations. These parts need to be transported to one location — Toulouse, France — where they are put together to build the aircraft.
The gigantic wings of the Airbus A380, for instance, are manufactured in Wales, UK. They are flown out in enormous Airbus Beluga planes to the manufacturing plant in France. There are thousands of other suppliers making various components for the aircraft. That means thousands of logistical points.
If even one of those were disrupted — say, due to a flash strike by factory workers — it would delay the assembly of an ordered aircraft.
The manufacturer would have to financially compensate the customer for the delay (as per terms in the contract), thereby reducing the revenue of the company.
Managers at the assembly plant constantly monitor their supply chains and practice intense audits to prevent such delays and avoid revenue loss. They benchmark the performance of all entities in the supply chain, checking processes, the quality of the products delivered, and the timeliness of the deliveries.
How should you conduct such a review?
The more often you do an audit, the lesser will be the risk. But auditing a complex supply chain can take weeks or months.
Here’s a checklist of what you should include in the planning of the audit.
- What are the objectives and expected outcomes of the review?
- The scope of the audit — what should the audit cover?
- How will you ensure that business continues with minimal disruption during the review?
- Who are the recent suppliers and logistical points?
- Identify security vulnerabilities in the supply chain, along with corrective measures
You should always be aware of the known and unknown challenges and be prepared with contingency plans. Do you have a backup plan for the unexpected interruptions in your supply chain?
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The danger of doing nothing
As we’ve already mentioned, inefficient supply chains can result in delayed product deliveries. Delayed deliveries mean delayed payment receivables from customers, which would impact cash flow.
But it doesn’t stop there. A manufacturer would then delay payments to their suppliers, logistics companies, distributors and everyone along the supply chain. That would result in loss of credibility among both customers and supply chain partners.
Inefficient supply chains can result in revenue loss and damaged credibility.
A manufacturer can prevent all this by doing a supply chain audit.
Risks beyond your control
Supply chains typically involve a number of processes, including:
- Purchasing raw materials and components
- Warehousing, distribution and logistics
- Inventory management
- Contract management, invoicing and accounts
Since the processes are interdependent, reliance on one supplier for crucial components or raw materials poses a high risk. Do you have alternate suppliers in case your regular supplier is unable to deliver for any reason?
Natural calamities, trade wars, trade embargoes, fluctuations in stock markets and commodity exchanges. Do you have contingency plans for each of these?
Failure at one logistical point can have a cascading effect, and eventually disrupt the whole supply chain. And when that happens it will take considerable effort to identify the root cause of the problem (through an audit trail and investigation).
The digital component
Data and physical security are also important. It is imperative to do penetration testing to ensure the security of your supply chain information systems and networks.
But it’s not only about software and processes; much of it involves people.
The auditor must go out and meet vendors, contractors, customers and suppliers and communicate security best practices. Visit factories and warehouses to physically check the inventory and make sure the supplier businesses actually exist.
Service-level agreements and contracts should include performance clauses with penalties for delays. You want to mitigate risks at all levels, so leave no stone unturned.
A thorough audit yields rich dividends
Doing a regular review of your supply chain requires considerable effort but it will pay rich dividends in the long run.
Minimising your risks requires both an understanding of the internal dependencies and third-party risks. So look at your contracts and check for:
- Regulatory requirements
- Compliance and adherence to policies
- Quality of processes
- Vendor code of conduct
When done regularly, supply chain review can reduce costs and lead to greater profitability and growth. But that’s only if you do a thorough audit to check all risks and to ensure that all processes and entities are compliant with standards and policies.