How To Shift Manufacturing Supply Chain Strategy During A Pandemic
Forbes Business Council publishes article by Actify CEO Dave Opsahl
CEO at Actify, Inc., helping manufacturers to build some of the world’s most complex and advanced products.
Covid-19 continues to have a devastating impact on all aspects of the manufacturing industry, but I believe that the profound disruption to supply chains will ultimately force many companies to reconsider both the structure and strategies that govern their supply chain management.
In the first few months of the crisis, companies have been struggling to deal with wild swings in demand, unpredictable supply stoppages and overloaded transportation systems. Manufacturers will undoubtedly triage these issues and begin to stabilize their businesses to allow production to resume at an acceptable level.
Even while this short-term recovery is underway, many executives have recognized that while this pandemic is a single disruptive event, it has exposed a set of very significant issues that represent unacceptable risks to their businesses. Investors and customers are going to expect manufacturers to identify their areas of greatest vulnerability and re-engineer their supply chains in order to better respond to disruptions caused by financial crisis, climate events, diseases and geopolitical upheaval.
There are a number of areas that will need to be reconsidered from supply chain modeling to sourcing policies.
Supply Chain Modeling
The software tools and techniques for modeling and planning complex supply chains have gotten much more sophisticated. The availability of cloud-based products that can process massive amounts of data and utilize artificial intelligence (AI) to simulate and optimize demand plans should have resulted in much better models.
Unfortunately, very few companies take full advantage of the tools they own, and they tend to model only demand with limited ranges, from best case to worst case. Truly identifying supply chain risk requires modeling massive disruptions of both demand and multiple tiers of supply.
Manufacturers have become fundamentalists with regard to inventory. There is an entire generation that has grown up believing all inventory is bad, expensive and wasteful. The reality is that inventory is a powerful tool and often represents an effective investment to counter the risk of supply and demand uncertainty or very long transportation chains. Establishing “buffer stock” of semi-finished or finished products can significantly reduce the disruption caused by supply or demand surprises.
Most manufacturers don’t like to talk about politics, and they certainly don’t like to consider it in the context of their supply chains. Unfortunately, one of the things that became very obvious during the Covid-19 crisis is that local, state and national governments had a major impact on supply chain disruption. While this is to be expected when voters are demanding action, the result is that trade wars, tariff issues and nationalized manufacturing policies are becoming increasingly important to global supply chains. Supply chain professionals need to begin incorporating these political influences into their medium and long-term planning.
Over the last 20 years, most manufacturers have pursued a strategy of eliminating vertical integration and relocating production to wherever the lowest cost location was in the world. While it’s easy to make a case for specialization and labor arbitrage, we are witnessing an excellent example of how brittle that has made our critical supply chains.
In a time of volatile demand changes, most large companies found themselves with no ability to address supply shortages even on an emergency basis. Having outsourced nearly all component production to remote geographies, many companies have been unable to restart production because whole countries were shut down, and ocean freight is nearly impossible to expedite.
Companies need to strike a better balance between cost and resiliency as they decide on what to manufacture and where to produce it.
In many industries, original equipment manufacturers (OEMs) and even tier one and tier two suppliers have adopted a procurement strategy of “single source/single tool.” There are lots of justifications for this decision, including lower costs, vendor leverage, reduced variability and improved quality, but the obvious downside is supply chain risk. With a global disruption like Covid-19, or even smaller ones like the 2011 tsunami in Japan or the Icelandic volcano eruption, manufacturers found themselves with the dreaded “single point of failure” where a shutdown in one small vendor could cripple the entire supply chain.
In the future, as companies consider how to inoculate themselves against supply chain risk, they will have to reconsider dual sourcing strategies or certified alternative suppliers and duplicate tooling.
Visibility And Communication
The reality of modern manufacturing is that supply chains have become physically longer and more complex. A single end product may have a supply chain with hundreds of vendors in four or five tiers and a similar product might have an entirely different set of suppliers. The problem is further complicated by the extraordinary velocity of material and information. In most industries, the visibility and bidirectional communication is simply not adequate to deal with normal operations and is completely overwhelmed in a pandemic with massive changes in supply and demand on an almost daily basis.
Most supply chain communication today is unidirectional (OEM downward), single tier and transactional (structured EDI messages). True visibility across the supply chain is very rare, and the players tend to deliberately limit how much information is shared with their supply chain “partners.” The technology exists to support real-time dialogue and collaboration throughout the supply chain, but there is still active resistance in many companies.
Post Covid-19, many large companies are going to demand much greater visibility down through multiple supplier tiers, and aggressive suppliers will begin to offer this capability as a competitive differentiator.
Adversarial Supplier Relationships
One of the prevailing trends in manufacturing over the last several decades has been the inequity and antagonism in customer/supplier relationships. This lack of trust and cooperation has been particularly damaging as companies struggle to respond to massive disruptions and severe financial distress.
In an environment where supply chain interdependency is the rule and disruptions are becoming more frequent, we must see a shift toward more “relationship-based sourcing.” Companies, supply chains, and whole industries have to learn to work together in order to deal with these kinds of events without jeopardizing the survival of the entire manufacturing community.