In Cost-plus Supply Chains, Success Will Depend Upon 3 Factors

The Russia-Ukraine war is entering its fourth month, and its impact continues to spread across industries and sectors of the global economy. Combined with rising inflation and the ongoing COVID-19 pandemic, companies are feeling the pinch from supply chains now burdened with new costs.

Yet while it might be a cliché, there’s an opportunity lying behind those challenges.

Enterprises that are worrying about rising costs, scrambling to ensure supplies and wondering whether the just-in-time, global supply chain operating model is dead can make the most of this moment by rethinking their supply chains and pivoting to look at more than just efficiency.

To help companies on their way, here are three important factors to consider to ensure supply chains deliver value amid rising costs:

1) Partnerships and collaboration

Supply chain leaders have talked about collaboration for a long time. Today, cost increases make it increasingly advantageous to rethink their partnership strategies, starting with Tier 1 suppliers. It’s important to recognize how suppliers have performed during the recent disruptions and maintain relationships to drive value for the supplier ecosystem. Paying attention to supplier relationships and not focusing exclusively on cost will help enterprises prepare for future risks and disruptions.

2) Operating models

Is globalization dead? Is the just-in-time supply chain now a quaint relic? Maybe, maybe not. Companies are looking at regionalization, nearshoring or reshoring to optimize their supply chains and build needed resilience.

But they should avoid veering too far in the opposite direction. The optimal approach will vary by industry and even by company, and there is right now an opportunity for supply chain leaders to determine where they need to invest and structure supply networks.

3) Sustainability

There has been an uptick over the last 6-9 months in the number of companies that are committed to incorporating sustainability into their decision making. Sustainability is one more variable added to the list that supply chain organizations consider when making decisions around cost.

With a large proportion of carbon emissions coming from the supply chain, companies now have an incentive to prioritize supplier collaboration and build out the infrastructure to measure and track sustainability metrics. And by focusing on sustainability, they can often lower their costs in the process.

To thrive in a cost-plus environment, supply chains must reexamine everything

There are no easy fixes for rising costs – investment in the right areas is important but will take time to deliver results. The current environment provides a chance for companies to look at the gaps in their supply chains and implement the right operating model to plug those holes.
It’s important to take forward conversations around risk management, resilience, agility and sustainability, and not go back to thinking just about cost. That might sound counterintuitive in a world of cost-plus supply chains. To navigate these challenges, enterprises will need to be more data-driven, make the right investments in technology and rethink partnership strategies to gain greater visibility and improve collaboration.

Go deeper into the cost-plus world of supply chains in this webcast by The Economist and GEP.