Supply Chain Finance: Research findings point toward failed cost cutting strategies

The Hackett Group, a global strategic business advisory firm, has recently detailed the problems large companies face mitigating commodity cost increases.

As noted in a recent research study, most companies tend to take a fragmented, siloed approach to anticipating and mitigating costs, Hackett found.

“We see a definite trend toward near-shoring,” said Hackett Senior Research Director Pierre Mitchell in an interview with SCMR. “At the same time, companies are hedging their bets by manipulating the financial elements of their supply chains.”

Mitchell added that more advanced companies forecast prices and do some basic hedging by adjusting contract length, purchase volumes, or inventory levels. But few take a truly cross-functional approach, or do the analysis required to understand the impact of commodity cost increases on profitability, use specialized analytics to anticipate future commodity costs, or provide clear direction and policy for making hedging decisions.

Hackett’s study also offered recommendations and guidelines for companies to improve their ability to mitigate input cost inflation. Hackett recommended that companies focus on integrated input-cost planning, to forecast and plan for changes in commodity prices, and use robust scenario planning to link supply plans, including pricing, with demand/business plans. An integrated approach to commercial risk management was recommended, to better understand commercial objectives and create a “spend portfolio” that is managed by procurement and finance working together. Finally, Hackett recommends that companies move beyond simple input-cost mitigation, to consider broader cross-functional approaches to cost mitigation, such as changing product designs, financial hedging, or vertical integration such as acquiring a critical niche supplier.

“There’s no question that companies are facing a real roller coaster when it comes to input costs in the coming year,” said Mitchell. “It’s a ride that senior executives would love to get off. But most companies simply don’t have the metrics, tools, and organizational models in place to make this happen. The looming threat of rising inflation is an opportunity for executives to build a business case for developing new capabilities, and improving cross-functional capabilities.”

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