The past 18 months have delivered unprecedented challenges to businesses, including managing COVID-related lockdowns, the closure of facilities, hindrances in transportation services, breakdowns in the supplies of essential raw materials, and health and safety issues. It has been an extremely challenging time for supply chain leaders across all industries, and it has also exposed some of the weaknesses of our global supply chains.
Keeping these challenges in mind and listening to the experiences from executives across various industries, although many of the traditional practices to manage supply chains fall flat in this turbulent period, there are many existing principles and practices which could help organizations build resilient supply chains. In this post we’ll go back to the basics and see how these practices can still be applicable in turbulent times to help overcome disruptions.
Following are some of the best practices and proven strategies that can be applied to “crack the code” of supply chain disruptions.
Collaboration is key in this time of uncertainty. Organizations need to collaborate with all of their supply chain partners – including suppliers, transporters, 3PL providers, distributors, retailers, and internal stakeholders. The best recent example of this are the partnerships between pharmaceutical companies and food ordering and delivery companies, which have begun to handle the last mile delivery of products to the customer’s doorstep.
Another example is adoption of well-known practices like vendor-managed inventory (VMI), which is tried-and-tested in industries such as automotive manufacturing and pharmaceuticals to reduce the risks related to lengthy lead times in the procurement of supplies and raw materials – including active pharmaceutical ingredients and packaging materials.
Before diving into procurement strategies, let’s take a look at the semiconductor chip procurement issue. It was quite evident last year that many of the automotive digital cockpit equipment manufacturers – and the automakers that rely on these chips – found themselves competing with makers of notebook computers, smartphones, TVs, and home exercise equipment that were using the same chip suppliers and struggled in procuring these chips due to limited supply. The consumer products sector, which buys chips in much larger volumes, featured higher-priority customers than automakers as far as the chip suppliers are concerned. All told, the global semiconductor chip shortage will cost automakers $110 billion in lost revenues this year.
Let’s analyze the current procurement challenges using the famous Kraljic’s supply matrix. The firm’s supply strategy depends on two dimensions: profit impact determined by volume purchased, percentage of total purchased cost, or impact on product quality or business growth; and supply risk assessed in terms of availability, number of suppliers, competitive demands, make or buy opportunities, and storage risks.
Kraljic’s Supply Matrix – Purchasing Must Become Supply Management
Per Kraljic’s Supply Matrix, for items where the supply risks are high even though profit potential is on the lower side, organizations need to ensure supply of those items – and it’s fine to build redundancy for those supplies and shortlist multiple suppliers for the same set of items. For items where the supply risks are high and the impact on profit potential is high, organizations need to build strategic partnerships with the suppliers – and collaboration is the key for this strategic partnership.
It is recommended to build up local inventory of safety stock to withstand delays in supplies and long lead times.
The push system initiates production in anticipation of future demand while a pull system initiates production as a reaction to current demand.
A push strategy works fine for all items where demand is almost certain, it is fine to manage the supply chain based on long forecast times. Similarly, on the economy of scale dimension, if there is greater value by aggregating the demand, organizations should go for a push-based strategy.
It is typically difficult to implement a pull-based strategy when lead times are so long that it’s hard to react to demand information. With longer lead times, it is more intuitive to implement a push-based strategy.
On the other hand, a pull strategy works fine for all items where demand uncertainty is high and it’s better to manage the supply chain based on realized demand. On economy of scale dimension, if aggregation does not reduce the cost, a pull-based strategy would make sense.
As many of the manufacturing facilities were closed during the pandemic, there was limited capacity for production and organizations had to decide how to sequence the products they make. It is costly to make things that do not sell, but it’s also costly not to make things that sell – so the capacity needs to be segregated as reactive and non-reactive. Low-risk products where demand is certain and prices are low should be produced in advance based on the forecast. On the contrary, decisions on high-risk products with unpredictable demand are typically delayed until there is a clear market signal on customer demand. As a result, organizations should make the low-risk products and postpone the production of high-risk products until additional market information is available. This means that risk-based scheduling – which involves committing the less risky products or models early to non-reactive capacity – will help organizations manage their production with limited capacity.
Organization should work with sales and operations teams and need to obtain the individual forecast data – rather than consensus – for all products or models. Organization should classify the products as risky or certain based on the variance and standard deviation of the individual forecasted data points on each product. Finally, organizations should try to convert a push strategy to a pull strategy for all risky products.
In this challenging time, supply chain planning and flexibility in demand planning activities are key. Planning during times of uncertainty drives the need for shortening the planning cycle and reducing the reviews from monthly to weekly, down to daily.
In postponement or delayed differentiation, the firm designs the product and the manufacturing processes so that decisions about a specific product is being manufactured can be delayed. The manufacturing process starts by producing the generic or family product, which is differentiated to the specific end-product when the demand is revealed.
Innovative vs. Functional Product
In his seminal article, “What is the Right Supply Chain for Your Products?”, Marshall L. Fisher distinguishes between two extreme products – functional products characterized by slow technology clock speed, low product variety, and typically low profit margins, and innovative products characterized by fast technology clock speed, short product lifecycles, high product variety, and high profit margins. Along with this product category, when considering the level of demand uncertainty, organizations can decide what is the best supply chain strategy for that product.
While procuring the functional product, an emphasis should be placed on minimizing the total landed cost – which includes:
- Unit cost
- Transportation cost
- Inventory holding cost
- Handling cost
- Duties and taxes
- Cost of financing (if any)
On the other hand, focusing on landed cost is the wrong strategy for innovative products. The focus in this case should be on reducing the lead time and on supply flexibility. Organizations should focus on minimizing the landed cost for functional products and reducing the lead time and on supply chain flexibility for innovative products.
As disruptions caused by the pandemic persist – leading to growing concerns around the movement of materials across geographies – organizations should build up stock locally in either company-owned warehouses, or work with 3PL partners to stock the inventory in warehouses near the customer base. Organizations should try to move most of their portfolios of functional products – which typically have very low demand uncertainty – close to the customer by stocking them in local warehouses or on the racks of partners, including retailers or local shop owners. Organizations should also utilize their local delivery partners to pick up and deliver the items to the customer’s doorstep, and use a business model for revenue sharing with their partners.
Reduce SKU proliferation
Customers are increasingly demanding a wider variety of products, driving the development and introduction of more goods for organizations to stock. Increasing the number of SKUs may result in an unnecessary cost burden for the items which are slow-moving, which can also result in uncertainty in demand forecasting. Limiting to a set of SKUs will help organizations plan and forecast the demand appropriately, which will increase accuracy and decrease the facility cost by reducing the space and trapped capital in warehouses dedicated to slow-moving items. It’s better to focus efforts on a limited set of SKUs and products that are in high demand. This will help ensure a stable supply chain for best-selling products.
Organizations should also conduct a careful analysis of supply chain cost trade-offs and build up an appropriate level of redundancy into the supply chain. To do so, organizations should ask themselves these critical questions:
- Does a sourcing strategy with limited suppliers make sense for a key component?
- What is the mechanism available to us to quickly recover from sudden supply disruptions?
- Is it okay for us to hold a large amount of inventory of key components?
Organizations should shift their focus from cost-to-serve to cost-to-win.
Many stakeholders are involved in the entire supply chain execution and logistics network, and the ability to build enough redundancy throughout the network will ensure continuous, uninterrupted supply chain operations. Organizations must build collaborative relationships with suppliers, identify those supply chain nodes where the risks are highest, and then create multiple backup plans and multiple sources of supply, even if this means a slight cost increase. Qualifying more suppliers creates more options and greater flexibility.
Localization vs. Globalization
Companies are paying special attention to events that have led to supply chain delays threatening their near-term viability. More companies are looking at nearshoring as a solution, in order to find suppliers near them to supplement or replace suppliers in Asia or other parts of the world.
Organizations should try to build hyper-local networks with partners, retailers, and local shop owners. They should make best use of local facilities of retailers and shop owners to move the products close to customers. Organizations should also make use of their delivery partners to pick the items from these local facilities and deliver them to the customer’s doorstep.
Today there is a special focus on moving from globalization to regionalization and then ultimately to localization - e.g. moving from organized retail to more traditional and localized retail, which increases the need for a hyper-local network. Today there is an added advantage to having distributed facilities across multiple locations, rather than a centralized one. Firms have regionalized or localized their supply chains to avoid disruption caused by travel restrictions related to the pandemic, and this helps them better service their customers and make customer deliveries without delays or logistical issues.
Ultimately, organizations should implement an effective distribution strategy where expensive products with low customer demand and high demand uncertainty are stocked at central warehouses, while low-cost products facing high customer demand and low demand uncertainty are stocked at multiple local warehouses. Organizations need to devise their distribution strategies while keeping in mind which items make sense to stock in central warehouses, and which items should be moved and located in regional and local distribution centers.
Improving the Visibility
We need to make real-time information available across the supply chain stakeholders - manufacturers, suppliers, 3PL providers, distributers, retailers, and customers in order to see, control, and pro-actively manage inventory and shipments from the production source to their destination.
All stakeholders should agree to share and provide the access to real-time information about all the processes that occur before and during transit-from planning, sourcing, production, handling, transport, and last-mile delivery. We need to encourage and drive integration across the service lines, channels and systems - partner systems, transporters & truckers to exchange information.
If there is a delay in the order fulfillment or delivery of goods or materials, it will be better to provide that visibility upfront rather than later, as this will help to build mutual understanding and trust across the various players in the supply chain.
eCommerce and Direct to Consumer (D2C) Models
There is a growing focus on eCommerce and Direct-to-Consumer (D2C) in this pandemic time. In this channel, speed, last-mile capabilities, and the ability to comply with the terms and conditions of the market is of supreme importance. D2C requires a deep understanding of the demand patterns and the customer segments, and organizations should have the infrastructure and support systems in terms of partners and delivery services all the way to the doorstep of customers.
Sustainability (Environmental, Social & Governance)
Most importantly, investment in the human element is crucial, in order to build a culture of trust and empathy in this difficult time and take care of all people involved – including employees, partners, and third-party providers such as pickers, truck drivers, and last mile delivery people.
In order to keep up with ESG commitments and promote green supply chains, organizations should consider using solar panels in warehouse facilities and electric vehicles for last-mile delivery. Organizations should aim to design low-carbon distribution networks and contract with low-emissions service providers. As mentioned earlier, during this time, greater emphasis was placed on localization and shorter supply chains, which in turn helped to lessen the environmental impact and cut down carbon emissions.
- Kraljic P. “Purchasing Must Become Supply Management.”, Harvard Business Review, September – October 1983.
- Fisher M.L “What is the right supply chain for your Products?”, Harvard Business Review, March – April 1997.
- Rethinking Supply Chain Risk New Threats Demand New Tools and Strategies, Harvard Business Review.
- Fisher M.L “Making Supply Meet Demand in Uncertain World.”, Harvard Business Review. May – June 1994.
- David Simchi-Levi, Philip Kaminsky, Edith Simchi-Levi, Ravi Shankar “Designing and Managing the Supply Chain. Concepts, Strategies, and Case Studies”, Third Edition.
- Surviving Uncertainty – The Economic Times Supply Chain Management & Logistics Summit 2021 | 25th June.
Note: “Views or opinions presented in this paper are solely those of the author and do not necessarily represent those of his employer.”