Can Your Customers Tell You How to Handle Supply Chain Disruptions?

Poor supply chains, they really can’t catch a break these days!

In just the last five years or so, there’s been a global pandemic, wars in multiple regions, worrisomely high inflation, shortages of labor and raw materials, a 400% increase in supply chain cyberattacks, and a ship stuck in the Suez Canal for six days.

Will things ever get easier for the companies tasked with managing supply chain disruptions? The lovely Debbie Downer from SNL is probably the best person to answer this question. She’ll likely mention many sources of frustration, including that hurricanes appear to be getting more intense with climate change, that global instability is also on the rise, and that supply chains are getting more digital while cybercriminals are getting more sophisticated.

All Debbie Downer-ing aside, there are ways to manage the mayhem. We’d like to point you to a group of people who can help you do so. They may not be experts in implementing shared risk management programs or using smart devices for condition monitoring, but they DO know what matters most in your product offering. They’re your customers.

Product testing data given by real target customers holds a gold mine of insights into how CPG companies can land on the right supply chain disruption solutions. We’ll talk about the classic supply chain resilience-building strategies too, but the power of customers insights, even regarding how to manage supply chain disruptions, should not be underestimated.

First, some discussion of the impact of supply chain disruptions.

Types of supply chain disruptions and their financial impact

A supply chain can be disrupted either internally or externally. The former includes issues like bottlenecks, technological disruptions, warehouse explosions, and labor disputes, all of which could cause a supply chain delay. The latter includes things like natural disasters, pandemics, and wars. Cyberattacks are in a bit of a gray area, since they can be carried out by external actors or by a company’s own employees.

The cost of all these issues combined? Around $184 billion per year, according to the J.S. Held Global Risk Report. For an individual company experiencing a disruption to their supply chain, the loss can surpass 40% of their earnings in a year.

It’s tempting to offset these costs by lowering the quality of your products or cutting features that you don’t think people care much about. This can be risky, however. Indiscriminate cost reduction strategies can severely backfire if you don’t test their impact on consumer perception.

Why supply chain disruptions impact the CPG industry so intensely

Consumer packaged goods supply chains often involve sourcing specific ingredients from all over the world. If a natural disaster hits an area where one raw material is sourced from, the entire product line might be in jeopardy.

For the food and beverage industry, supply chain bottlenecks and disruptions are extremely detrimental, since food products typically have a short shelf life and it’s not possible to stock up on inventory.  

Even without risk of spoilage, there’s still urgency. Seasonal products ranging from summer dresses to Christmas ornaments have to hit the shelves at a specific time of year in order to ride on the whims of consumers. What’s hot in July might be passé in September, and nobody’s going to be decorating their tree in January.

A quick overview of supply chain resilience-boosting strategies

Companies typically improve their supply chain resilience via three main strategies: enhancing visibility, seeking alternate sourcing to skirt around a potential supply chain shortage, and fostering collaboration with their suppliers. Let’s take a brief look at each.

1. Enhancing visibility. You can identify potential supply chain issues (like bottlenecks and material shortages) before they become critical business problems by implementing real-time tracking systems and using predictive analytics to forecast consumer demand. Smart sensors can help you stay on top of inventory levels and automatically reorder materials when necessary, and they can also be used to monitor ingredient spoilage for food and beverage manufacturing. If you’re looking for a comprehensive view of your supply chain, you can even run simulations with a “digital twin”—a virtual replica that captures the network in all its glory (and complexity).  
2. Seeking alternate sourcing. While many CEOs may prefer to have a single supplier for specific materials in the name of efficiency, redundancy is your friend when the once-in-a-lifetime (read: once a year) disruption occurs. Alternate sourcing is part of a flexible response plan that will help you adapt quickly to the unexpected. Avoiding over-reliance on single suppliers and investing in redundant capacity will help you balance cost optimization with supply chain resilience.
3. Collaborating with suppliers. You don’t have to just be a passive recipient of your suppliers’ wares. If they’re showing signs of being vulnerable to supply chain risk, you can partner with them to establish joint planning processes, implement shared risk management programs, and create transparent communication channels. In fact, supplier partnerships are now such an integral part of supply chains that there’s a whole term for these intimate supplier networks: keiretsu, which is Japanese for a “system” or a “grouping of enterprises.”

What your customers can tell you about your supply chain options

Let’s zero in on one of the more powerful methods for managing disruption risks in supply chains: sourcing from multiple suppliers. It sounds pretty simple, but there are some hidden perils. What you buy from different sources may have subtle differences, and your customers might notice—particularly if it’s something that involves sensory aspects like taste or scent.

Will the new supplier meet your customers’ expectations? The only way to know for sure is to test the new version of your product against the one using the familiar supplier. Known as alienation testing, this will show you what product changes will have the strongest positive and negative effects on customer perception. (Many companies are using alienation testing to mitigate the impact of China import tariffs.)

Oftentimes, there’s no viable alternate sourcing for a raw material. If the supply of that material is impacted by something out of your control—say, tariffs influencing distribution pricing—then you might need to raise your prices. Companies are realizing, however, that responding to tariffs by changing your pricing must be based on methodical, survey-based research like the Van Westendorp pricing model.

Can you let the price for certain of your products rise while other product prices stay the same, causing margins on the latter to shrink? This is known as cross-subsidization, and it can work quite well—as long as you understand your customers.

At Highlight, we can’t tell you how to avoid supply chain disruptions (they happen to the best of the best), but we can tell you how to build a compass that helps you utilize flexibility and adaptability to your advantage. It’s not just about finding new suppliers; it’s about finding suppliers that your customers like. It’s not just about changing up your pricing strategy; it’s about understanding price elasticity and how this relates to your customers’ value perceptions.

Product testing shows how to prevent supply chain disruptions from losing you customers

Rocky supply chains are here to stay, and making changes to your suppliers, your pricing, and other things will always be part of the process of continuously managing them. The better you know your customers, the better you’ll know what changes you can afford to make.

Integrating product testing insights into your supply chain risk management shows you very clearly how customers will respond to an increase in price for each product in your offering, a change that makes your product taste slightly different, or the elimination of a previously hyped-up benefit (perhaps you’re looking to drop a hard-to-source functional skincare ingredient).

No amount of supply chain visibility or alternate sourcing will help you if you decide to make changes that your customers don’t like. It’s hard to satisfy everyone when you’re already under so much pressure, but with the right data, you’ll know how to satisfy as many people as possible.