It is more important than ever for supply chain professionals to find innovative and creative ways to build a more resilient and flexible supply chain. Several recent supply chain disruptions have strained many companies’ ability to secure critical parts. Since the beginning of the global pandemic in 2020, for example, the supply of semiconductors has been severely restricted. Many chipmakers were operating well below normal capacity due to pandemic restrictions. Though most of those restrictions have now been lifted, companies are struggling to meet current demand fueled by increased consumption of electric vehicles, 5G phones and other chip-dependent products.
To better respond to such disruptions, organizations must work to strengthen aspects of supply chain management that increase resilience, such as: B. A focus on capacity management, a diverse supplier network and a culture of continuous improvement. We have identified five levers or actions that can do just that.
What does a resilient supply chain look like?
A supply chain with the following characteristics is better able to ensure supply when a disruption occurs.
High capacity:Capacity is an organization’s ability to produce a product or service. A high-capacity supply chain can persist, adapt, or rapidly transform in the face of disruption. Capacity is one of the most important concepts in supply chain theory. Capacity-oriented organizations are able to maximize transportation capacity, production capacity, and distribution capacity, which lowers their inventory requirements due to supply chain efficiencies. Holding additional inventory leads to higher carrying costs and the risk of an obsolete product. The ability to rapidly meet varying levels of demand through capacity is what separates an average company from a great company.
High forecast accuracy: When the demand forecast matches actual customer demand with a high degree of accuracy. Although this depends on the industry and product type, a good target for forecast accuracy is usually 70% or more (anything beyond that is usually costly to achieve and requires advanced forecasting software). Publishing a demand forecast is the first step in the sales and operations planning (S&OP) process, and high accuracy in the demand forecast allows companies to be more proactive in addressing supply chain challenges.
Diverse supplier network: When a supply chain depends on a small number of suppliers or a specific delivery region, it is often vulnerable to disruption. Ideally, a company should have a large number of primary and alternate suppliers, and the supplier base should span multiple regions. This allows companies to respond quickly when a disruption occurs at a specific supplier or in a specific region and outperform the competition.
A culture of continuous improvement: An organization that regularly assesses and refines its supply base and makes incremental improvements throughout the supply chain is generally more resilient. Resilient organizations use internal and external audits to ensure there is no bias in favor of current SOPs or suppliers. How often these audits should be performed depends on various operational factors such as industry and product life cycle.
systems thinking:With this philosophy, challenges are not considered in isolation, but in the context of the entire supply chain, regardless of the phase in which they occur – from planning to delivery. Systems thinking is the most important aspect of a resilient supply chain as it avoids or mitigates the risk of common challenges such as the “big gap” between sales and operations and the bull-whip effect. Systems-thinking organizations have a structured and conscious S&OP process that creates the consent of all stakeholders.
Is the supply chain resilient?
The first step in building a more resilient supply chain is to conduct a qualitative and quantitative assessment of your current supply chain to determine if there is an issue and how best to resolve it. Start gathering information and interviewing stakeholders within the organization to identify their pain points. For example, the company may have problems with its contract manufacturers not sourcing enough critical components. In this situation, interviews should be conducted with the contract manufacturer’s purchasing department to determine whether this problem is due to external factors such as a shortage in the market or internal factors including poor demand forecasts.
In addition, an assessment of current demand forecast versus actual inventory is required to ensure the customer and its contract manufacturers are using best practices in demand and supply planning. As previously mentioned, top-tier companies typically have 70% to 80% accuracy in their forecasts. Unfortunately, due to the global pandemic and the corresponding shortages in key areas such as raw materials, building materials and consumer goods, many companies in all sectors are significantly further off the mark with their forecasts. Supply chain professionals should be aware that it can take an entire business cycle—boom to recession—to judge the accuracy of a forecast.
How can the supply chain be made resilient?
Once a company has assessed how resilient its procurement process is, it can use the following levers to explore how to improve that resilience.
Lever 1: Identify and screen alternative providers.Many organizations depend on a limited number of manufacturers and authorized dealers for parts. A limited number of suppliers exposes a company to the risk of stock-outs and lower accuracy of the supply forecast in the medium to long term. Lower supply forecast accuracy can lead to something akin to a “bull whip effect,” which occurs when a disruption in forecast leads to larger and larger disruptions throughout the supply chain. Procurement and logistics processes are susceptible to such distortions in demand and supply.
One way to address this challenge is to find an alternative vendor base. First, an organization should begin by contacting the authorized distributors for a particular part, which can usually be found on a manufacturer’s website. If this list is exhausted, you may need to find reliable brokers and dealers. These vendors must be identified, verified and qualified as they are not authorized distributors.
Finding the right brokers and traders is a crucial part of the process. It is important to create a thorough supplier questionnaire that the supplier must complete to ensure a proven track record and favorable payment terms. One downside to using brokers and dealers is the premium added to the retail price of the part. Proper negotiation strategies and tactics are therefore crucial to reach an agreement that is in the best financial interest of your company while securing the critical parts required.
Lever 2: Identify alternative parts. While not always possible, try to find alternatives to primaries. For example, this year Tesla successfully switched to an alternative part by rewriting the software in its vehicles to use a different chip, allowing the company to avoid the brunt of the chip shortage crisis. Purchasing and procurement departments should work closely with their engineering teams to identify approved alternatives and make necessary changes.
Lever 3: Audits: Audits should be conducted to ensure suppliers have the capacity, quality controls and ethical work practices in place. A capacity check is used to determine if the supplier can meet increased demand. Quality control checks help reduce the likelihood of discrepancies or defects in the product. Finally, ethical work practices are critical to ensure the safety and reliability of suppliers’ employees. Oversight of labor practices can lead to legal problems for an organization and negative publicity – as evidenced by media coverage of the strained relationship between Apple and its supplier Foxconn.
Lever 4: Integrate vertically: Direct control over the manufacture of a product or service is another method of risk reduction. Vertical integration often requires significant upfront costs, but allows companies to expand their ecosystem and protect against supply chain disruptions. A key consideration with vertical integration is whether it will lower the total cost of ownership or reduce risk.
Lever 5: Robust S&OP process: Uniform forecast models and a single source of truth are important methods to prevent a possible bull-whip effect. However, you can have the most advanced forecasting tools in the world, but when the data is muddled, it’s just garbage in and garbage out. Therefore, a thorough S&OP process is required to reach consensus on demand and supply forecasts.
As businesses continue to grapple with the ongoing economic impact of the pandemic, it is important to assess your supply chain resilience to protect against future disruptions. Recent history shows the importance of having a plan to promote supply chain resiliency. Now is the time to implement an actionable strategy so your business is better positioned to weather the next storm.