Over the last 12 to 18 months, global manufacturers have seen unprecedented disruption to their supply chains. The COVID-19 pandemic, trade wars, new trade treaties such as the United States-Mexico-Canada Agreement, rising labor rates in China, intellectual property theft, human rights concerns and more have contributed to shifting demand, interrupted supply lines, and slowed production, creating unpredictable and unfavorable cost dynamics. Earlier this year, Fortune reported that 94% of the Fortune 1000 experienced supply-chain disruptions as a result of the pandemic.
The ripple effect, from Asia to Europe to North America, has had a dramatic impact on sourcing and production. China is no longer the default option for offshore manufacturing, and an important share of spending is moving to countries in Southeast Asia, as well as India and Mexico. Some companies are sourcing onshore as well. According to an April report from professional services firm Sikich, 48% of the industrial sector planned to diversify their supply chains over various geographic regions.
No industry is immune. Consumer and business travel are way down, but defense spending is up. Automotive factories have slowed or halted production in response to softening demand. Oil and gas faces a slow recovery and significant long-term price pressures.
Consumer durables are struggling to respond to new demand and address unfilled backlog for different products. And industrial equipment manufacturers are just starting to reopen factories.
There are exceptions. Businesses in medical products, semiconductors and high-tech have seen less impact to customer demand, but their dependence on China for sourcing is a potential problem looking ahead.
In response, manufacturers have had to reassess their short-, mid- and long-term global sourcing and production strategies. Following are steps that can be taken to respond and prepare your supply chain for future disruptions.
Short-Term: Reacting to Market Shifts
Most manufacturers, understandably, did not have a viable backup strategy in place when core supply lines were interrupted in Q1 2020. Backup sources were in place for exceptions only; they were never designed to address primary supply needs. No one anticipated an event like COVID-19.
In the early stages of the pandemic, a lot of new product design was halted entirely. Material shortages were a huge problem. In some cases, it was simply about getting the right materials to the right location. In March and April, a diversified conglomerate redeployed most of its product-engineering and supply-chain staff to sourcing parts for customer orders. They essentially abandoned their regular day jobs during that time. It was an extraordinary measure that was necessary to react to an urgent need.
Other companies responded, and continue to do so, in a number of different ways including:
Mid-Term: Implementing Recovery Plans
Every manufacturer’s goal is to get back to full production, but they also need to get a tight handle on costs and conserve cash due to the reduced revenues caused by the pandemic. Some are doing this by:
For one farm equipment manufacturer, a concerted cost management effort incorporating some of the actions mentioned above produced a huge benefit. With pressure to reduce costs, the company was considering shutting down less profitable product lines. One in particular was popular with customers, but contributing very little to the bottom line. The company was ready to shut it down unless it could find a way to reduce its cost structure. Working in collaboration with its third-party vendor, the design team conducted a detailed analysis of three specific subsystems: driveline, hydraulics, and chassis. This exercise uncovered multiple opportunities for savings. Certain parts were identified that could be made more cost-effectively by using different manufacturing methods and standardizing certain materials to enable better volume pricing. Additionally, the team identified sourcing changes that helped achieve additional savings, by pinpointing components that could be effectively outsourced to lower-cost regions. Lastly, the team was able to identify parts that were good candidates for re-quoting or renegotiation. In total, the company identified per-unit savings of almost $700, more than enough to justify keeping it in production and keeping customers happy.
Long-Term: Reinventing Supply-Chain Strategies
The ultimate goal of every global manufacturer should be to create a supply chain with the resiliency and flexibility needed to negate the impact of the type of events we’ve recently experienced.
There’s nothing simple about that, but many companies have been moving in this direction before COVID-19, albeit at different speeds. An exceptional few are nearly there. The key to success is optimizing efficiency and adopting new practices that provide resilience and mutual benefit across the supply chain, such as:
Some of these steps are already common practice for early adopters in industries such as automotive and transportation. But with the advent of secure, cloud-based collaboration tools, they’re available to most any manufacturer. Design engineers can use these tools to share early designs with parts suppliers to discuss manufacturability and costs. Sourcing teams can run designs against virtual digital factories, which automatically analyze production, assembly and logistics costs, and provide feedback to suppliers, reducing quoting processes from weeks to days.
While there have been a number of factors over the last 12 to 18 months pressuring global manufacturing supply chains, COVID-19 was the booming wakeup call for all. We’re still seeing its impact, and the fallout and will continue for the foreseeable future. The ability to react to the resulting disruptions, and ramp production back to “normal” levels, is already dictating the winners and losers in the short term. But the ultimate competitive advantage will be to those manufacturers that can build resiliency and flexibility into their supply chains to withstand the future disruptions to come.
Stephanie Feraday is CEO of aPriori, a provider of digital manufacturing simulation software.
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