Supply chains inherently face levels of uncertainty. Meeting revenue targets, satisfying customers, and containing costs rely on companies being able to minimize that uncertainty and solve problems quickly and effectively. The complexities in today’s supply chains – including erratic demand patterns, drastic supply constraints, and accelerating costs – have overwhelmed current capabilities for most companies. To remain competitive, profitable, and relevant, companies need to innovate and advance their supply chain capabilities.
Before the pandemic, brands dealt with constraints that impacted overall sales and revenues but were still able to deliver mostly on time and in full using traditional long-term forecasts. This was primarily due to more predictable customer demand, fewer material shortages, and adequate control over internal operations.
In today’s complex, disruptive and disconnected supply chain, brands are dealing with a myriad of constraints spanning across supply, labor, capacity and logistics, threatening to decay revenue and profitability. Supply chains have become so complex that brands have little visibility into how much and what materials will arrive and when. This impacts the brand’s ability to meet existing order commitments and revenue targets and strains relationships with customers. The traditional approach to demand prioritization of “first order in, first order out” is no longer working.
“As we look back over the last 40 years, managing the supply chain has been relatively easy, for the first 38,” says Steve Lykken, vice president for enterprise solutions at e2open, a provider of a cloud-based, end-to-end supply chain management platform. “But in the last couple of years, it’s become really hard.”
“Companies are flying blind,” adds Rob Barrett, a U.S. supply chain advisory leader at KPMG LLP. “They don’t have the visibility they need in their extended supply chains to know where the constraints are until it is too late. On top of this, they’ve been dealing with one of the greatest demand and supply imbalances we’ve ever seen.”
Over the last few decades, manufacturing and distribution functions have been increasingly outsourced and globalized. Along with the advantages, it has accelerated a brand’s reliance on the capabilities of their suppliers, their suppliers’ suppliers, and the transportation modes between. It’s easy to see how brands have lost visibility across multiple tiers of supply and potentially stacked disruptions. Meanwhile, suppliers are making decisions and solving problems without visibility into the demand and fulfillment priorities held by the brand. When a contract manufacturer under commits to the brand demand, the brand has no idea why, and it may be too late or costly to repair the misalignment, resulting in negative impacts to quarterly revenue.
Suppliers need to be able to quickly make decisions that align with the priorities and strategy of the brand. Leading brands and suppliers have made progress in collaboration to limit misalignment, but today’s new norm of disruption has exponentially overwhelmed that progress. At the beginning of the COVID-19 pandemic, demand for semiconductors plummeted as the automotive industry forecasted that sales would fall. As a result, the allocation of semiconductor supply shifted from autos to other industries such as high-tech devices. Later, as the automotive demand spiked, factories were unable to satisfy the new need for chips required to be installed in vehicles. This supply and demand imbalance has had a ripple effect that has thrown many industries and supply chains into disarray.
For brands and manufacturers to be responsive to near-term demand fluctuations, they must first achieve a greater level of connectivity and visibility from their end-to-end supply ecosystem. To do this, they choose a supply chain business network that connects internal production, contract manufacturers, OEMs, and logistics partners, allowing for a holistic, view of supply and inventory. “What if” scenarios can then be run to predict how expected inventory can be allocated to meet demand where it is needed.
“They can test the impact of buying components at a higher cost to see how much additional revenue they'll get as a result by being able to promise more to their customers,” says Lykken. “Acquiring some components at a higher price could also improve margin by more than the increase in cost, making those purchases worthwhile.”
“OEMs get a full picture of how the supply and logistics support the demand,” says Lykken. “And then they can run scenarios to figure out which components are the most constrained and how acquiring certain additional inventory would impact revenue. Scenarios can also analyze the impact on revenue of shipping delays and evaluate whether the cost of expedited shipping is worth meeting a promised delivery date or making the sales quarter.”
During evaluation, the analysis might show that the opposite is true for a specific scenario. “If the higher-cost material doesn't unlock any revenue, it’s not advisable,” says Barrett. “What is required to make these determinations is the ability to run complex demand prioritization options and then leverage that to determine which supply constraints need to be solved to fulfill that demand prioritization. A lot of companies don't have the advanced technology to run these complex scenarios.”
Increased visibility also allows manufacturers to cope with constraints by not locking up supply during the planning process. “If pieces are missing to build certain products, they tend to wait for them,” says Barrett. “In today’s environment, it’s better to free up all available supply and figure out how to best use it with the demand that you're seeing.”
“The trick is to figure out what the manufacturer can do with that product in the interim,” says Barrett. “Don’t lock up the allocation of the supply on hand but do make it available to other orders that could use it without sacrificing the priority order.”
From an OEM perspective, visibility into the extended supply chain allows it to know what can be produced and by when. More than that, it can use supply chain data to produce build plans that are looped back into the system for the benefit of contract manufacturers and other partners who are executing the strategy to produce the higher-revenue products.
“That way,” says Lykken, “OEMs should be able to promise more products to their customers and realize more revenue as a result.”
The same kind of strategy also helps contract manufacturers avoid the struggle of keeping their order commitments to OEMs by fully understanding the constraints on their sources of supply. But with greater visibility, OEMs can collaborate with their contract manufacturers on solving supply shortages and ensure components are ready when needed.
“Some OEMs are taking over the sourcing of major components and the relationships with providers so that they get a better allocation to their contract manufacturers,” says Lykken. “Greater supply chain visibility is creating this shift” and allowing them to use supply chain data to produce more strategic build plans across their extended supply chains.
Ultimately, the entire supply ecosystem is collectively responsible for delivering on promises made by OEMs. “When manufacturers commit to a customer on product availability or shipment timing or a certain level of quality, the supply chain is responsible for delivering on those commitments,” says Barrett. “You’re not always going to be able to keep your promises, but your ratio is going to be a lot higher if you have a better command of the allocation of constrained supply.”
There continue to be plenty of challenges around how to proactively manage supply constraints, but valuable solutions are available, and they all start with the same first step. “The key is to develop structured processes of viewing available inventory and collaborating on shortages,” says Lykken. “Then, run analysis on the data to come up with a reliable plan and communicate the results to customers.”
Lykken concludes: “Leveraging these and other strategic capabilities, companies can empower their teams to see and manage beyond the enterprise and drive maximal value. Companies need to bring all pieces together on a single platform connected to a global, multi-tier trading partner network, providing the right data, applications, and artificial intelligence. With these collaboration capabilities on a single platform that grows with you as your business needs mature, your direct procurement team becomes more strategic, and you meet today’s requirements while equipping your organization for future success.”
Resource Link: www.e2open.com
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