Strategies for Suppliers to Alleviate Pressure
September 16, 2022
The past three years have seen the world plagued with black swan event after black swan event. Traditional business wisdom tells us that unlikely events should be discarded, but what happens when the four horsemen all decide to pay a visit at the same time? The result is an exponential increase in critical suppliers, challenges attracting and retaining talent, supply-chain ossification, and inflation as the cherry on top.
Despite all of the different difficulties, there is still a path forward, and it is, in fact, a well-worn path. Macroeconomics has waxed and waned, and geopolitical tides move in and out, but successful businesses have always focused on fixing and improving within their immediate sphere of influence.
Factors Contributing to Supplier Pressure
Seraph has identified four main factors contributing to supplier pressure. Geo-political factors are affecting supply chain efficiency. Additionally, governmental monetary policy in response to COVID has set new records for inflation. These factors not only raise the costs of inputs, but also create disincentives in the labor markets for workers. Increasingly, suppliers compete with less-strenuous entry-level positions like cashiers, gas station attendants, and more, raising the cost of labor.
OEM Increase in Critical Suppliers
Since 2019, OEMs have experienced a 500% increase in the number of critical suppliers. This increase is not only bad for OEMs, who are more at risk for factory shutdowns, but also for suppliers. Suppliers may face tens of thousands of dollars worth of fines every minute an OEM is shut down. This represents a massive roadblock to profitability for both suppliers and OEMs.
Talent Acquisition and Retention
Talent acquisition and retention have suffered in the post-COVID environment as well. All up and down the hierarchy, suppliers struggle to attract and retain talent in such a competitive labor market. Managers have a plethora of companies to employ them and may quit without warning for better offers. Similarly, floor workers have competitive bids from less stressful workplaces, which suppliers, because of margins, also struggle to compete with.
Supply Chain Breakdown
A combination of COVID policy and PPI increases has affected supply chain efficiency and mobility. Initially, because of lockdowns and furloughs, freighters could not offload raw materials. One of the most profoundly impacted inputs was, of course, semiconductors which still have not come back online completely. Additionally, some raw materials like aluminum are not only increasing in price because of PPI inflation, but they are also decreasing in supply, which drives up costs even further.
Finally, inflation is an unrelenting vicious cycle that is unlikely to abate in the near future and is equally as unlikely to disappear without causing other economic shockwaves. Inflation is the pernicious factor that turns fixed costs into variable costs, influencing a supplier’s ability to budget and project into the future. Inflation is generally not included in long-term contracts which further complicates a business’ ability to remain profitable. In the final analysis, suppliers and the final customer are both stuck with the inflation bill.
Solutions for Suppliers
While the picture may look bleak, there is robust hope in looking within the sphere of influence; within the company, and up and down the supply chain to OEMs and other suppliers.
First, suppliers should prioritize bringing on a neutral 3rd party to gain some perspective. Identifying specific problems amid a quickly-changing environment where good news is scarce can be challenging. However, experienced third parties like Seraph can properly identify problems that were previously misdiagnosed. These insights allow suppliers to bring complex problems into their locus of control and make significant improvements in areas previously regarded as immutable.
To the extent that it’s possible, suppliers should make a concerted effort to automate their manufacturing process. Automation requires a hefty initial investment, but it turns into a fixed cost with predictable performance and future expenses. The human talent can also easily move to a different company division where their skills can be more appropriately used for tasks only humans can accomplish.
Improving facilities is critical for suppliers attempting to retain talent. A litany of different studies have shown that employees prefer a better working environment to higher pay. Adding better meal options, a gym, or even cafés can help build employee morale, improve productivity, and reduce expenses related to churn. Some suppliers have gone as far as to add Starbucks and other similar stores on-site to attract and retain talent.
Negotiate with OEMs
The exponential increase in critical suppliers may have one silver lining: Suppliers can now bring OEMs back to the table to negotiate more favorable terms. While renegotiating has been taboo in the past, the current environment has brought suppliers a new and genuine sense of power. Additionally, OEMs had their best years in terms of top-line revenue during the height of the COVID pandemic. Suppliers are now in a position to ask for more money because of how reliant OEMs are on them, how strictly OEMs are held to sales projections, and how difficult it is to change a supplier.
Finally, leadership can and must undergo evaluation. Unfortunately, upper management has every reason to portray internal problems as external problems. If a problem stems from the supply chain crisis, rather than a disconnect between the leadership and the shop floor, it can go comfortably unaddressed. However, we have noticed that leadership evaluation is one of the most potent tools for suppliers to regain an upward trajectory. Many of a supplier’s most imposing problems are internal, which is both good and bad news. However, internal problems have internal, actionable solutions, which means they’re inherently solvable.
For as rare as they are, unlikely and tragic events, economic instability, and geopolitical volatility are a part of life. When applied to business, they are a purifying fire that helps strengthen and refine a company, making it anti-fragile and ready for the fertile grounds of a bull market. Seraph has the expertise to help navigate and overcome the obstacles posed by the current market and world conditions. Our operations consultants earned their stripes working with suppliers and OEMs and are ready to help your company plan to survive short-term pain and thrive in the long-term market. Contact us today to schedule a discovery call, or see our case studies for more information.
Director of Business Developmment