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.
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.
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.
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.
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.
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.