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Supply Chain Solutions


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Supply Chain Solutions

  1. 1. Supply Chain Solutions Grant Thornton Consumer and Industrial Products practice Part 2 of 3 Creating a reliable, profitable supply chain: navigating exchange rate, working capital and business uncertainties Executive summary “When the dollar slips in value, as Companies doing business overseas it did sharply in 2008, U.S. companies must be prepared to navigate an obstacle sourcing and operating internationally course that includes exchange rate shifts, in countries with currencies appreciating supply chain disruptions, tight credit against the dollar can face rising material markets and nearly unprecedented and shipping costs as well as increasing economic volatility. But which hurdles labor costs,” explains Tim Dumond, are companies most concerned about? Corporate Advisory and Restructuring And what are they doing to maximize Services principal. “If rising exchange Grant Thornton LLP collaborated success during these uncertain times? rates are not offset by increased revenue, with World Trade Magazine and the Institute for Supply Management to According to Grant Thornton’s recent those costs can put pressure on sourcing produce a series of three surveys survey, conducted in partnership with and pricing strategies and create concerning supply chain solutions. World Trade Magazine, foreign exchange operational and strategic risks,” says These surveys are intended to provide rate fluctuations and the ripple effect of Dumond. a snapshot of issues and opportunities in the supply chain industry. We exposures across the supply chain are a continued> hope this second survey, along with concern for manufacturers. More than targeted recommendations from four in 10 (42%) manufacturers report Grant Thornton’s supply chain experts, offers you insights you can use as you that exchange rate shifts were detrimental evaluate your sourcing decisions. to their business over the past year.
  2. 2. Creating a reliable, profitable supply chain: navigating exchange rate, working capital and business uncertainties (continued) The Grant Thornton/World Trade However, nearly three in ten (29%) survey only in dollars, in which case implementing survey also points to some interesting respondents indicate that the shifting an effective hedging program should be success strategies. Of the executives exchange rate has helped their businesses considered. Before implementing such a surveyed, 56 percent are taking action to at least somewhat over the past year. In program, companies must ensure that they optimize the working capital invested in many cases, this revenue boost happens have the appropriate level of knowledge their supply chains. With many banks because the sales volume of finished goods and expertise. Otherwise, they may be reducing the amounts companies may in Asia and Europe has been affected increasing, rather than decreasing, the borrow against their assets, asset-based positively by the depreciation of the dollar overall risk to the company. lending is tighter than ever, which makes with respect to those local currencies. Although it is clear that exchange rate optimizing working capital all the more fluctuations can have a positive or negative critical. Because capital can be tied up Recommendation financial impact, these fluctuations in the supply chain for days or even Companies that want to reduce or eliminate comprise only one of many factors that weeks, many companies are finding that exchange rate risk may want to establish supply chain executives must consider freeing up working capital can boost their pricing and contracts in U.S. dollars rather when they assess vendor and customer bottom line substantially. than local currencies when possible. locations. Other factors include the As the supply chain continues to However, companies may find that many quality of raw materials, the expected stretch around the globe, companies suppliers are leery of taking on all the risk transportation costs and the desire to enter inevitably face increased risks of supply and therefore may resist doing business a new market. disruption. Whether they are dealing with continued> the financial distress of a key supplier, the consequences of political unrest or even the loss of product after a shipwreck, Impact of the exchange rate in the past year companies must be prepared with a plan to handle these potential supply disruption risks. Six in 10 manufacturers have contingency plans in place to Significantly helped our business Somewhat helped our business } 29% 4% 25% respond to breakdowns within their No impact to our business 29% supply chains. Whether these contingency plans are effective when they are put to the test, however, remains to be seen. Somewhat hurt our business Significantly hurt our businessly } 42% 33% 9% Survey results Finding #1 Exchange rate fluctuations hurt some Impact of the exchange rate on sourcing manufacturers and help others. Survey respondents report mixed experiences with exchange rate shifts. More than four in 10 report that the Significantly increased overseas sourcing Somewhat increased overseas sourcing } 16% 3% 13% exchange rate shifts have hurt their No impact to overseas sourcing 55% businesses over the past year, citing issues such as increasing materials costs overseas due to a depreciating U.S. dollar. Somewhat decreased overseas sourcing Significantly decreased overseas sourcingy } 29% 24% 5% 2 Supply Chain Solutions – Part 2 of 3
  3. 3. Creating a reliable, profitable supply chain: navigating exchange rate, working capital and business uncertainties (continued) Finding #2 as possible — to 45 or 60 days rather be analyzed to determine whether the Many companies are taking action to than 30. Ideally, companies should amount of inventory can be decreased. optimize the working capital invested in not be required to pay for material Another benefit of moving inventory is their supply chains. until after they have been paid by their that most lending arrangements advance More than half (56%) of supply chain customers. Extending payment terms a higher percentage against receivables professionals indicate that their companies also will reduce the need for short-term than against inventory, thus providing have taken action over the past 12 months borrowing. additional liquidity. to optimize the working capital invested Another popular technique is to Monitoring the financial stability in the supply chain. The most common modify contracts such that legal title to of your customers and vendors and actions companies have taken are extending the product passes late in the process — aggressively managing the related payment terms with suppliers, streamlining for example, when the product arrives receivables and payables are critical inventory infrastructure and improving at the U.S. facility. Changing the terms actions as well. Thorough credit checks inventory management across the entire governing the passage of title means on new customers can reduce the negative supply chain. that the clock on payment doesn’t start impact of bad debts, but given today’s ticking until the material has arrived. This economic environment and global Recommendation contract modification is in lieu of the business relationships, traditional credit Companies should be working to reduce countdown to payment beginning while checks are no longer enough. Reviewing the amount of working capital required the product is crossing the ocean by ship. recent customer and vendor financial to manage their supply chains. Extending Now is also a good time to reduce the statements is the only effective way to payment terms with all or most of the amount of inventory kept on hand, understand the financial health of a key company’s suppliers can be an effective because maintaining inventory balances is supply chain partner. way to defer operating cash outflows. a drain on operating cash flow. Inventory continued> Companies should attempt to extend turnover and production processes should payment terms with vendors as long Optimizing the working capital invested Actions taken to optimize the working capital invested in the supply chain* in the supply chain Yes 56% Altering payment terms for suppliers 55% No 22% Inventory infrastructure improvements 50% (e.g., warehouses, transportation) Unsure 22% Supply chain wide inventory 44% management strategies Information technology improvements 37% Sharing of forecasts and planning schedules 36% with supply chain partners Altering payment terms with customers 25% Financial assistance for suppliers 9% Financial assistance from customers 7% Use of trade finance products 3% Other 4% *Multiple responses allowed 3 Supply Chain Solutions – Part 2 of 3
  4. 4. Creating a reliable, profitable supply chain: navigating exchange rate, working capital and business uncertainties (continued) Establishment of contingency plans Contingency plans addressing risk scenarios* Yes 60% Financial failure of key supplier 54% No 26% Natural disaster 54% Unsure 14% Shortage of critical materials/ingredients 51% Suppliers violating your company’s ethics/code of conduct 24% Political instability 21% Terrorism 19% Other 3% *Multiple responses allowed Finding #3 Recommendation organization responds initially and how Most companies have established As supply chains continue to lengthen and they notify the appropriate parties. The contingency plans to respond to grow in complexity, many organizations breadth of the potential issues also may breakdowns in the supply chain. are developing business contingency require support from professionals outside Six in 10 (60%) supply chain professionals plans to respond to a range of scenarios, the normal supply chain organization, indicate that their companies have for example: financial distress at a key including accounting and legal functions. established contingency plans to respond vendor, infrastructure breakdowns, natural Supplier insolvency is a growing to breakdowns within the supply chain. disasters, political instability, intellectual concern; therefore, companies must have Contingency plan scenarios include property infringement, and ethical or effective plans in place to prevent the the failure of a key supplier, a natural governance risks. However, when business effects of insolvency from rippling across disaster, a shortage of critical materials contingency plans are put to the test, they the supply chain. It’s important to line up or ingredients, a supplier violating the may not be sufficiently robust. viable replacements or alternative suppliers, company’s code of ethics or conduct, “A good business contingency plan particularly for a product or service that political instability and terrorism. needs to start with identifying all possible is essential to the company’s operations. risks throughout the organization’s supply If no alternative sources exist, companies chain, including a thorough analysis of all must be prepared to offer programs and vendors. It’s also critical to consolidate incentives to maintain the flow of those all information on all the products the products from key suppliers. Carrying company depends on from its supply base additional inventories of crucial products in order to understand the range of risk can offset supply risk to some extent, but exposures,” explains Dumond. executives must keep in mind the increased To be effective, the contingency carrying costs for these inventories and plan also must outline internal response strike a balance between optimizing cash protocols for varying scenarios, including flow and managing supply risk. who in the supply chain management continued> 4 Supply Chain Solutions – Part 2 of 3
  5. 5. Creating a reliable, profitable supply chain: navigating Contact information Wally Gruenes exchange rate, working capital and business uncertainties National Managing Partner (continued) Consumer and Industrial Products T 214.561.2640 E Don Bailey Regional Practice Leader Advisory Services T 949.878.3303 Looking ahead Executives must manage their operations E The growing intricacy of the supply chain as efficiently as possible, reducing Tim Dumond has clearly put an increasing premium inventory to conserve cash and optimizing Principal on managing supply chain risk. Major the working capital required for their Corporate Advisory and exchange rate fluctuations and currency operations. And they must maintain Restructuring Services devaluations can have positive or negative sufficient flexibility and agility in their T 248.233.6943 E consequences for companies that are supply chains to meet customer demand. moving product from one country to sell It’s a tall order. Yet given the supply in another. At the same time, executives chain’s impact on a company’s bottom must be ready at a moment’s notice to line and the many factors that can wreak About the survey respond to many possible contingencies havoc on the company’s profitability, Grant Thornton partnered with Clear Seas Research, a subsidiary of BNP Media, to that might disrupt their supply chains. effective supply chain risk management produce this original research about current has never been more challenging — or and planned sourcing strategies. More than 200 responses from readers of World Trade more important. • Magazine and members of the Institute for Supply Management were gathered from March 23 through April 6, 2009. About Grant Thornton’s supply chain advisory services Grant Thornton provides a broad continuum of supply chain solutions: commodity planning, sourcing process evaluations, pricing reviews, technology solutions, supplier assessments, supplier action planning, risk response proto- col analysis, inventory and asset management solutions, and consolidation and resource management. About Grant Thornton LLP Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity. In the U.S., visit Grant Thornton LLP at About World Trade Magazine World Trade Magazine is a business-to- business logistics journal delivering news and information to U.S. subscribers active in domestic and international trade. World Trade Magazine covers every aspect of the global supply chain from the movement of Major exchange rate fluctuations and currency devaluations products across the U.S. to the procurement from and delivery to international markets. can have positive or negative consequences for companies © Grant Thornton LLP that are moving product from one country to sell in another. All rights reserved U.S. member firm of Grant Thornton International Ltd Content in this publication is not intended to answer specific questions or suggest suitability of action in a particular case. For additional information on the issues discussed, consult a Grant Thornton client service partner. 5 Supply Chain Solutions – Part 2 of 3