Navigating Raw Material Volatility
The ongoing raw material volatility presents a significant challenge for industrial companies. Although recent harsh conditions appear to be improving, businesses need to learn from these experiences and strengthen their ability to manage future fluctuations. In today’s uncertain environment, managing supply volatility should be a top priority for executives and involve cross-functional collaboration.
Managing Critical Raw Material Risks
Businesses should evaluate key risk indicators related to their most critical raw materials. By implementing both tactical and strategic measures, they can alleviate short-term pressures and manage long-term exposure to volatility and scarcity risks. Building the necessary capabilities is vital for dealing with constant uncertainty and can be seen as essential operational skills needed for survival.
Responses to Uncertainty
Effective uncertainty management requires capabilities that support a variety of responses across short, medium, and long-term timeframes. For sudden shortages or black swan events, rapid crisis response capabilities are essential. The COVID-19 pandemic and the war in Ukraine have demonstrated the importance of quickly assembling a team to handle crises and mitigate threats. Other capabilities enable businesses to quickly adapt to near-term disruptions and prepare for future uncertainties.
Preparing for Effective Crisis Management
When facing supply crises, businesses must build a solid fact base to improve transparency regarding material availability and substitutions across suppliers and regions. Companies can then implement measures to increase supply, adjust demand, or both. Establishing a cross-functional rapid-response team is crucial for achieving these objectives during a crisis. Key design considerations for such a team include:
Cross-Functional Participation
Ensure the right cross-functional and executive-level stakeholders are involved in decision-making and action implementation. Establish closed-loop governance for accountability and optimize meeting frequency for productivity and efficiency.
Fact-Based Decisions
Implement digital capabilities to improve inventory visibility and promote data-driven decision-making in focused forums.
Scenario Planning
Assess potential scenarios across various time horizons and create phased initiative options to protect against unforeseen blind spots.
Solution Focus
Allocate time for developing and discussing innovative solutions, using crises as opportunities for business model innovation.
Proactively Managing Uncertainty
Industrial companies must be prepared to manage uncertainty as a constant business challenge. By implementing various tactical and strategic actions, businesses can mitigate the effects of volatility, enhance planning effectiveness, and broaden their response options for disruptions. This can ultimately help protect their operations from the consequences of uncertainty.
Pricing Task Force
Establishing a pricing task force with representatives from pricing, commercial, product, and distribution departments is crucial for maintaining stability after crises or black swan events. This task force should focus on aligning pricing with global strategy, tightening price monitoring, and bringing discipline to the pricing process. It is essential to minimize margin destruction, control price discounts, manage stock reductions, and monitor market information while limiting exposure to pricing fluctuations on the supplier side.
Proactive Scenario Planning
Shifting from reactive to proactive responses involves adopting scenario planning, always-on strategic planning, sales and operations planning (S&OP) and so on. These practices enable businesses to evaluate potential supply and demand changes, understand the impact of different scenarios, identify pressing strategic issues, and make rapid decisions at the product level.
Focus on Supply Chain Resilience
Promoting supply chain resilience involves aligning strategic functions and achieving end-to-end visibility across the supply chain. Strategies include redesigning global and local networks, adjusting supply chain buffer parameters, proactively managing suppliers, orchestrating multi-enterprise supply chains, actively managing end-to-end risks, and deploying scenario prediction and simulation. Companies can achieve significant benefits by combining these actions.
Partnerships
Establishing partnerships across the value chain strengthens resilience by mitigating the risk of supply scarcity. Securing priority access to raw materials and components, considering vertical integration, and forming consortiums with peers can help achieve this goal. Examples include Tesla’s partnership with BHP and Ford’s joint venture with SK Innovation.
In conclusion, managing raw-material volatility poses a significant challenge for industrial companies. By swiftly implementing targeted strategies, companies can achieve superior resilience.
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