I have been involved in the manufacturing industry since 1979 and have worked in a wide range of industries for multinational, small, and mid-size companies. Though there was rarely a dull moment, I think 2019 and 2020 have been the most taxing and stressful years when looking at supply chains for manufacturing companies.
During the last two years, we have faced geopolitical issues, trade wars, and the COVID-19 pandemic. The old supply chain model of buying from the lowest priced supplier is no longer the model that will help your company grow or even survive the next crisis.
The new model for supply chains calls for agility, visibility, and a deeper understanding of the total supply chain. This means you not only need to understand your materials but also the materials that go into the products you are purchasing. You need a full understanding of the total supply chain from raw materials to supplied components.
Some people think the best supply chain model is to vertically integrate your company. This basically means you establish the ability to make everything you need. I feel this is not the best option, as you would have to venture into areas where your company may have little expertise or experience, and the cost of expanding into all these areas can be huge. I know many large companies have abandoned the vertical integration model over the last few years due to straining resources and capital. One of my mentors referred to it as being a jack of all trades and a master of none.
What does a better supply chain look like? Start by understanding the parts you need—direct and indirect supplies. Do not forget to look at services and utilities. Classify components as imperative, critical, or off-the-shelf items.
Items like raw materials, pre-processed parts, and utilities should fall into the imperative category. For these items, you need multiple qualified suppliers. I highly recommend to source them internationally, nationally, and regionally with three to five solid suppliers. If a natural disaster or a geopolitical event occurs, you can shift orders to areas less impacted. You might also want to have a good in-house inventory. In addition, you might want to consider having in-house capabilities you could bring online if needed. Consider a strategy that allows you to ramp up your in-house capabilities.
For critical items, multi-sourcing is also the goal with at least three suppliers spread out nationally, regionally, and locally. Make sure you look at lead times and availability of additional sources and then set solid safety stock levels for your inventory. Ask yourself how quickly you can find or bring additional suppliers online and how quickly you can shift to other potential suppliers. In-house capabilities are also a great strategy for these items.
For off-the-shelf items, one large national source is most likely what you need. However, you should research and investigate additional national and regional suppliers. Ensure their products are of the same quality as the one you are currently buying. In a crisis, the last thing you want to do is replace components with some of inferior quality.
Once you have established your sources, ask them to develop secondary and tertiary sources for your items and plans on how they will manage interruptions to their operation and supply chain. Make sure to regularly review those plans with your suppliers.
It is also a good idea to conduct a stress-test of your supply chain. This can be done by assuming an issue has arisen and playing the scenario through your entire supply chain to see how each supplier responds and how it would affect your operation. If there are any disruptions or stock-outs, review your plans and make the necessary changes. This could mean adding another source to your supplier list or changing one supplier out for another that has a better system in place.
Some items within your supply chain, like utilities, can be less manageable. You may not be able to choose your power, water, or gas supplier, but you can develop backups like on-site generators and gas or water storage tanks. Your customers might consider you more reliable if you can ensure operations during a crisis. The same goes for your electronic data management system. The cloud offers reasonable backup and off-premises storage, allowing you and your customers to access needed data.
As far as indirect supplies, things like the potential need for face masks or other supplies means your supply chain management team should pay close attention to local, national, and global issues. They need the authority to make decisions and quickly respond if they detect a potential issue with your supply chain. Also, they must be able to quickly release purchase orders before increasing demand outpaces supply.
Remember, if you fail your customers, they will go elsewhere and might not come back, which could cause your company major financial hardship. You need to look at your supply chain as part of your manufacturing operation and integrate it into your strategic business planning. As Benjamin Franklin said, “By failing to prepare, you are preparing to fail.”