It’s becoming 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. For instance, since the global pandemic began in 2020, the semiconductor supply has been severely constrained. Many chip producers operated well-below normal capacity due to pandemic restrictions. Although most of these restrictions have since been lifted, companies are finding it difficult to meet the current demand fueled by increased consumption of electronic vehicles, 5G phones, and other chip reliant products.
In order to respond better to such disruptions, companies need to work on strengthening those aspects of supply chain management that increase resiliency, such as 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 traits will be better able to ensure supply when a disruption occurs.
High capacity: Capacity is an organization’s capability to produce a product or a service. A supply chain with high capacity can persist, adapt, or transform quickly in the face of a disruption. Capacity is one of the most important concepts in supply chain theory. Organizations that are capacity-focused are able to maximize their transportation capacity, production capacity, and distribution capacity, which allows them to lower their inventory requirements and avoid holding extra inventory. As a result, these organizations have lower holding costs and a reduced risk of obsolete products. The ability to quickly meet varying levels of demand through capacity is what separates an average company from a great company.
A high level of forecasting accuracy: When the demand forecast corresponds with high accuracy to actual customer demand, it allows organizations to be more proactive in facing supply chain challenges. Although it depends on industry and product type, a good target for forecast accuracy is usually 70% or above (anything higher is typically costly to attain and requires advanced forecasting software).
Diverse supplier network: When a supply chain is dependent on a small number of suppliers or a specific region for supply, it is often vulnerable to disruption. Ideally, a company should have a high number of primary and alternate suppliers, and the supplier base should be located across several regions. This allows companies to quickly pivot when a disruption occurs at a specific supplier or in a specific region and to outperform the competition.
A culture of continuous improvement: An organization that is regularly assessing and refining its supplier base and making incremental improvements to the overall supply chain is generally more resilient. Organizations that are resilient use internal and external auditing to ensure there is no bias in favor of the current standard operating procedures or suppliers. How often these audits should be conducted will depend on different operational factors, such as industry and product lifecycle.
System thinking: Under this philosophy, challenges are not viewed in isolation but from the context of the entire supply chain, no matter at what stage they occur—from planning to delivery. System thinking is the most important aspect of a resilient supply chain because it avoids or mitigates the risk of common challenges, such as the “great divide” between sales and operations, as well as the bull-whip effect. System-thinking organizations have a structured and deliberate sales and operations planning (S&OP) process that creates buy-in from all stakeholders.
Is the supply chain resilient?
The first step toward building a more resilient supply chain is conducting a qualitative and quantitative assessment of your current supply chain to identify whether there’s a problem and the best course of action to solve it. Start by gathering information and interviewing stakeholders within the organization to identify their pain points. For instance, maybe the company is having issues with its contract manufacturers not procuring enough critical components. In this situation, interviews should be conducted with the contract manufacturer’s purchasing department to determine if this issue is due to external factors, such as a shortage in the market, or internal factors, such as poor demand forecasting practices.
Additionally, an evaluation of the current demand forecast relative to actual supply on-hand is necessary to ensure that the client and its contract manufacturers are using best practices in demand and supply planning. As mentioned earlier, world-class companies usually have between 70% and 80% accuracy in their forecasting.1 Unfortunately, many companies across all industries have been much further off in their forecasts due to the worldwide pandemic and corresponding shortages in key areas, such as raw metals, construction materials, and consumer goods. Supply chain professionals should be aware that it may take a full business cycle—boom through recession—to assess the accuracy of a forecast.
How to make the supply chain resilient?
Once a company has assessed how resilient its procurement process is, it can investigate using the following levers to improve that resiliency.
Lever 1: Identify and vet alternate vendors. Many organizations are dependent on a limited number of manufacturers and authorized distributors for parts. Having a limited number of suppliers puts an organization at risk of stock-outs and lower supply forecast accuracy over the mid- to long-term. Lower supply forecast accuracy can lead to something resembling a “bull-whip effect,” which takes place when a disruption in forecasting creates progressively bigger disruptions across the supply chain. Procurement and logistics processes are susceptible to these types of demand and supply distortions.
One way to overcome this challenge is to find an alternate vendor base. First, an organization should start by referring to the authorized distributors for a particular part, which can usually be found on a manufacturer’s website. If this list has been exhausted, then it might be necessary to find reliable brokers and traders. It will be necessary to identify, vet, and qualify these vendors because they are not authorized distributors.
Finding the right brokers and traders is a crucial part of the process. It’s important to create a thorough supplier questionnaire for the vendor to fill out to ensure a proven track record of performance and favorable payment terms. One downside to using brokers and traders is the markup on the part’s retail price. Proper negotiation strategies and tactics are thus vital to reaching a deal that’s in the best financial interest of your organization while also securing the critical parts needed.
Lever 2: Identify alternate parts. Although it’s not always possible, try to identify alternatives to primary parts. For example, Tesla was able to successfully pivot to an alternate part this year by rewriting the software in its vehicles to use a different chip, which allowed 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 modifications.
Lever 3: Audit your suppliers. Audits should be completed to ensure that suppliers have capacity, quality control checks, and ethical labor practices. A capacity check is used to determine if the vendor can meet higher levels of demand. Quality control checks help reduce the chance of variation or deficiencies in the product. And lastly, ethical labor practices are crucial to ensure the safety and reliability of the supplier workforce. Unethical labor practices can lead to legal problems for an organization and negative public relations—as demonstrated the media coverage of the strained relationship between Apple and its supplier Foxconn.
Lever 4: Vertically integrate. Taking direct control of the manufacturing of a product or service is another method of risk mitigation. Vertical integration often requires substantial upfront costs but allows businesses to expand their ecosystem and hedge against supply chain disruptions. An important consideration when vertically integrating is whether doing so can lower total cost of ownership or reduce risk.
Lever 5: Have a robust S&OP process. Uniform forecasting models and a single source of truth are both important methods for preventing a potential bull-whip effect. However, one can have the most advanced forecasting tools in the world, but if the data is convoluted, then it’s simply garbage-in and garbage-out. Thus, it’s necessary to have a thorough S&OP process to reach consensus on demand and supply forecasts.
As companies continue to struggle with the lingering economic effects of the pandemic, it’s essential to assess the resiliency of your supply chain to protect against future disruptions. Recent history shows the importance of having a plan to instill resiliency in the supply chain. Now is the time to execute with an actionable strategy so your company is better positioned to weather the next storm.
Note:
1. Rajesh Bagchi and Elise Chandon Ince, “Is a 70% Forecast More Accurate Than a 30% Forecast? How Level of a Forecast Affects Inferences About Forecasts and Forecasters,” Journal of Marketing Research, Vol. 53, No. 1 (February 2016), pp. 31-45: https://www.jstor.org/stable/43832443
