In the first part of this two part article, we outlined examples of the woeful supply chain backdrop against which businesses currently have to operate. In the early days of the COVID-pandemic, we saw lots of supply chain issues. There were a number of food shortages, toilet paper shortages, little to no PPE, etc.
In the time since, we’ve seen the economy bouncing back but not necessarily in smooth, even, measured ways. It has been jerky, surprise-ridden and riddled with interdependencies that are mucking up the best laid plans. Lumber products, laptops, household furniture, etc. (just to name a few) are still hard to acquire and expensive. In essence, the Vaccine Economy may actually be the Disruption Economy.
Proof of these disruptions is everywhere. Automobile buyers are stymied in finding new cars for sale due to a shortage of critical computer chips. Children’s back to school supplies are harder to find this year (and considerably more expensive to acquire) because many products have not made it onshore yet or are held up in other transportation bottlenecks. Retailers have had to air freight some items (at great cost) just to have something to sell.
Obviously, companies are being impacted by the above. Products, subassemblies, raw materials, etc. that they expected to receive are being held up. Products are stuck on ships/trains, awaiting truck transport, delayed by road accidents or construction. The biggest consequence of today’s supply chain problems is that J-I-T (i.e., Just-In-Time) deliveries and JIT/Lean manufacturing are less and less likely to occur. Another consequence is that firms must exhaust their (skeletal) safety stock just to complete a fraction of their customer’s orders.
One of the biggest conclusions for US manufacturers (and their purchasing and production planning leaders) is that they can’t go back to making things the old normal way if that method was a lean or JIT production process. For the time being, JIT is DOA (dead on arrival).
The 'new normal' is actually something many firms shied away from a couple of decades ago. Maintaining minimal safety stocks is only viable when supply chain disruptions are scarce and of low impact. Today’s supply chain disruptions are frequent and high impact and require more safety stock – levels more akin to what we saw in the 1980’s and 1990s.
So what do we do?
The enterprise plan
Smart firms are likely adjusting already while others have some work to do, fast! It appears that businesses, especially US-based businesses, should:
- Redesign their supply chain – Close-in product sources (e.g., local, near-shore sources) should be a material strategy choice now. Do you know who these suppliers are? Will they help a new customer like your firm or are they trying to hold onto their old customers?
- Reassess full supply chain risks & devise mitigation strategies – If your firm hasn’t reassessed its supply chain at least a couple times during the pandemic, it’s unquestionably out-of-date and in need of change.
- Identify and secure new sources for all, not just the most important, materials – Just as the computer chip shortage is impacting automobile sales, all it takes to derail the successful shipping of a product could be something low cost and trivial (e.g., a fastener, packaging, etc.).
- Hedge everything – Your supply chain management team should hedge the pricing and availability of just about everything you need to make and ship products (or deliver services). Hedging can help make volatile times more manageable, mitigate risks and improve profitability.
- Need new/revised tools to assess vulnerable orders – Your old ERP probably identified vulnerable customer orders by looking at the promise date and comparing that to the production schedule. That won’t work anymore as now you must also assess whether the production date will slip due to any number of supply chain disruptions. This requires understanding probabilities and risk mitigation techniques. It may be time for new analytics, new planning tools and more.
- Evaluate your ability to maintain full production capacity based on available supplies not just customer needs – While your customers might want you to produce certain products, your raw material inventory may not permit this. Your ERP Production Scheduling functionality may need to suggest a production plan that is doable not what is expected by customers. This is NOT ideal but it is possibly what’s needed to keep the plant open, people productive, etc. The alternatives are not pretty (e.g., plant closures, layoffs and lots of incomplete products).
- Add supply chain status info to customer portals – When customers log into your production order status portal, they’ll want to see more than a delivery date that is weeks/months further out than when originally promised. You need an updated portal with current status/content regarding your supply chain. If the customer can see your raw materials are still waiting to get unloaded at a deep-water port, they might be a bit more understanding with your date slippage.
- Manually re-assess safety stock levels for the foreseeable future – The pandemic and natural disasters have shown us that it is hard to predict what will become scarce next. As a result, every raw material/component needs to assessed on a monthly (or more frequent) basis and the safety stock levels adjusted accordingly. Some items, like metals, are experiencing wide fluctuations in price and the acquisition of safety stock may be very prudent especially for those materials that must be sourced outside of your own country. Firms hate to tie up capital on inventory but it makes sense to do so when shortages, disruptions and inflation are apparent. It’s also a good time to acquire more safety stock as the cost of capital is still a bargain.
- Create processes and teams to monitor ALL steps in the value chain and continually assess new threats - Threat assessment is now a continuous need not something that gets annual or sporadic interest. As this article shows, you can’t just let your threat assessment start and stop with your most close-in suppliers. You need to ascertain what’s going on throughout the entirety of the supply chain. The real surprises could be several steps away from your firm but the impact could be severe.
- Determine if current systems like Transportation or Trade Management, Production Scheduling, Supply Chain Management, etc. are acting in a relevant, appropriate manner given today’s supply chain environment – These were likely configured in a different day and age and may need to be reconfigured or reimagined because of today’s market quirks.