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Manufacturing & CPG Supply Chain

Are manufacturers seeing the forest for the trees? Why reducing the risk of supply chain disruptions matters

09/01/2022

by Scott Simari, Liya Getachew, and Tyler Welch

Being “lean” has consistently served as a key indicator of success for manufacturers. Companies have focused on maximizing value while minimizing waste through just-in-time manufacturing, automated resource planning, and supplier outsourcing. However, disruptions caused by COVID-19, geopolitical challenges, and supply chain issues have served as harsh reminders that hyper-lean manufacturing processes are not resilient enough to withstand significant disruption or prolonged volatility. As a result, manufacturers have been forced to re-evaluate the whole system in which they exist, the costs of efficiency, and the need for diversified and flexible supply chains.

A great example of the volatility uniquely impacting lean business is the recent semiconductor shortage. Manufacturers who are dependent on semiconductors, and lacked a strategy for reducing the risk of supply chain disruptions, quickly realized the immense scale of the semiconductor market as the shortage took hold. Due to the pandemic, the world saw a dramatic increase in spending on durable goods. Things like cars, appliances, and personal electronic devices were all in high demand – in the past three years alone, global demand for PCs increased by $56B. This demand continued to increase as devices became “smarter” and more advanced. An additional complexity that surfaced was the realization that a majority of semiconductors flow through a single company, Taiwan Semiconductor Manufacturing Co. (TSMC), with the remainder mostly going to manufacturing operations in China. COVID-19 lockdowns across Taiwan and mainland China resulted in major disruptions to the semiconductor supply. Even as lockdowns were lifted, manufacturers found little relief due to the overwhelming demand that created major bottlenecks within the global logistics system, causing longer lead times for anything flowing through ports.

Are you actively reducing the risk of supply chain disruptions?

Most recently, we have seen similar market volatility driven by other broad forces such as inflation and geopolitical conflict. Accepting that this type of increased volatility will be the norm in the coming decades, how can you calibrate your business to maximize value, minimize waste, and mitigate risk exposure in an increasingly volatile system? Start by asking yourself these questions:

• Do I understand the whole system I operate within and the full supply chain I’m dependent on? If you are only engaging with your direct suppliers, you may be missing critical information about the raw materials and parts that go into developing your products, as well as understanding your supplier’s suppliers and any risks or opportunities there. When you have a holistic view, you can better anticipate challenges and develop the strategies you need to quickly respond to change.
• Of my suppliers, who is a transactional relationship and who is a strategic partner? Have I established the right strategic partnerships? Strategic partnerships go beyond transactional exchanges of goods and services, and often incorporate shared incentives and more optionality around current and future transactions. That’s not to say all relationships should be strategic, what’s most important is to make sure you establish the right relationships with your suppliers.
• Are there opportunities for strategic alliances with my competitors and peers? If a major supply chain disruption occurs, what are the steps you can take–like resource pooling–that would ultimately mitigate the risk for multiple companies within your industry? Strategic alliances are perfect for helping resolve challenges that impact your industry. For example, it’s common for large technology firms to share their data center design because they aren’t competing on the best data center; they’re competing on who can leverage that infrastructure to develop the most valuable algorithms. By sharing data center information within an industry alliance, they are able to keep resources focused on the core business.
• When the next disrupting event occurs, will I have an advantage over my competitors that I can capitalize on? A firm understanding of your competitive advantages–and opportunities–will position you to continue your manufacturing operations, even as new supply challenges arise. Taking the time to identify and hone these advantages now will position you for success later.

It’s easy to stay focused on what’s right in front of you. But, if you’re struggling to find answers to the big-picture questions above, it might be a sign that you’re not investing enough time and resources into seeing the forest for the trees.

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