Supply Chain disruptions are changing the rules of Supply Chain Planning (SCP). Many of our manufacturing and process improvements over the last few decades have greatly reduced our lead times, costs, and efficiencies. Are they still effective in today’s world? They certainly deserve a second look. We have selected three different SC concepts that have been successfully used over the past several years and discuss some of the changes that may need to be considered.
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- Just-in-Time Manufacturing has been one of the most effective changes in the ERP world in the last few decades. This pivotal process change has provided great improvements in product quality and cost. It is now a huge risk, when delivery of supplies and services is so irregular and unreliable. Is it doomed or merely morphing?
- Global sourcing of material and services has opened a vast world of opportunities and choices. Off-shoring has been practiced for over 20 years. It resulted in lower labor costs, the establishment of new markets and the ability to take advantage of alternate tax and regulatory benefits. But do these benefits outweigh the costs of shipment delays and misses we are seeing today?
- We go to great lengths to develop supplier relationships and measure their performance. We have worked on developing solid connections with sole-source and single-source suppliers. We have focused on price, quality, quantity, and delivery to measure their performance. Do we now need to move a fifth performance criteria – low risk – higher in our priority of requirements?
- In this series of articles, we will discuss some of the changes to our “old rules” of SCP. Part 1 will focus on the SC disruption impact on JIT Manufacturing. Part 2 will discuss how we need to adjust our global sourcing rules. Part 3 will review our approach to vendor selection and performance measurements.
Part 1: JIT Manufacturing in a World of SC Disruptions
Traditionally, the concepts of JIT are quite simple (although not always easy to implement).
- Components and spare parts are only ordered when needed.
- You only order what is absolutely necessary.
- Inventory is kept low within the factories for a variety of benefits.
- Efficiency is the key, both in inventory and warehouse space.
- Upstream suppliers are kept on short notice to only produce inventory as needed.
Although the cost, efficiency and cash flow benefits are certainly huge benefits of JIT, we also introduced many risks in the process.
- Suppliers must be as defect-free as your own JIT production facility.
- Inventory must be provided on time, every time.
- Plants/warehouses carry only days or hours inventory, not months.
- Every step of the process must go without a hitch – if anything goes wrong, the entire process is threatened.
- When key suppliers come under strain, it is difficult to pivot.
- JIT delivery works only if you can deliver!
The recent SC disruptions have augmented the risk factors due to the impact of both the demand and supply components of the supply chain. JIT inventory policies rely on optimistic levels of demand and supply variations. Demand in many cases has either hit unprecedented levels (cleaning and health supplies) or dropped over the cliff (restaurant and travel industries). Labor and material shortages have caused a serious impact on supply. The shortage of even one component could shut down a production facility. This steady stream of JIT supply, production and demand has virtually ceased to be reliable. Standard risk management methods were not enough to prepare for the extreme volatility that we have seen in the past two years.
Can we now afford to be “too lean”? Is JIT doomed? Or does it simply need to be transformed? Cost is an incredibly powerful driver; therefore, JIT inventory will not go away. Some of the inventory rules will however need to be relaxed. We need to consider a shift from JIT inventory to “Just-in-case” inventory, for example, especially for our critical components. We also need to revisit our key performance indicators. If your main objective is to minimize inventory, and you are measured on this objective, you run the risk of unprecedented levels of unpreparedness. A pandemic-type of occurrence will be virtually impossible to navigate through.
What are some of the transformations we need to consider to better prepare for the next disruption? Consider some of the following ideas:
- Use 3PL solutions to hold inventory.
- Invest in E-Commerce and multiple fulfillment models. (One only needs to look at the likes of the Amazon business model.)
- Increase SC transparency. (The more visibility throughout the SC, the better each node can react to disruptions.)
- Utilize scenario planning modules provided by many IT solutions.
- Diversify sources and logistics routes where possible.
- Stock up on key materials.
- Give serious thought to digital transformation so that all components of your business are visible to all parties impacted within your organization.
- Consider using advanced analytics to better project trends and external situations that may impact your business. (The sooner you see a supplier in trouble, the sooner you can either help the situation, or pivot to another source.)
To be continued
Part 2: Revisiting our Global Sourcing Rules
Part 3: A new approach to Vendor Selection and Supplier Performance Measurements
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