Sometimes you can have a headache for so long that, after a while, you simply don’t notice it. It can be like that with the supply chain. No matter what size your business is — and no matter how good your partners are — your supply chain will be a constant challenge. In the words of Bob Duncan, founder of American Leather, a furniture manufacturer, “It’s amazing how hard it is to buy things from people.”
He certainly isn’t the only one to feel this way. “Supply chain management is a real problem,” agrees Beth Allen, VP of finance and administration at a Georgia-based chemical manufacturer. And it’s clear that it’s also an ongoing challenge for our survey respondents. Of all the risks in our survey, they see supply chain disruption as far and away the most difficult to manage. When they are asked to name their most important risks — both now and over the next three years — supply chain disruption comes second only to the risk of losing market share.
Even the smallest companies — whose suppliers are more likely to be based locally — consider supply chain disruption to be the leading issue. And, as their overseas networks grow, so will the number of things that can disrupt the flow of materials — from port strikes to natural disasters.
Midsized businesses have the toughest time of all. They want the cost benefits of sourcing from overseas markets but do not always have the wherewithal required to manage complex networks on a global scale. So, it’s not surprising that almost one in three (31%) respondents from this midmarket segment put supply chain disruption among their top risks — far higher than larger and smaller companies. As Allen puts it, “You can’t necessarily control even what’s going in your own supply chain, and you certainly can’t control events that are going on around you.”
A chain of contradictions
The long march to globalization is not without its challenges. While globalization may give companies access to lower prices than they could ever get at home, it also exposes their businesses to complex overseas risk. Yet, few manufacturers are prepared to simply pull back. Only one in 10 respondents see consolidation and simplification as a top supply chain management goal, making it one of the least common priorities.
If anything, manufacturers appear to want even more complexity in their lives. They are making choices that would seem — at first glance — to be contradictory. Take one of the classic dilemmas of procurement. Do we source from the suppliers with the lowest-possible prices worldwide — or do we buy from those closer to home and benefit from the faster delivery, flexibility and familiar legal systems that entails?
These two choices are usually seen as “either/or.” But our survey respondents appear to want both. On one hand, more respondents are looking to increase (36%), rather than reduce (26%), their near-sourcing activity in the next five years (see Chart 1). There is a similar split between those looking to increase, rather than decrease, onshoring. But our findings suggest that manufacturers are simultaneously looking to increase the amount they purchase from low-cost countries. Over one-third (37%) will source more from low-cost countries, whereas only 27% will buy less from low-cost countries. Such a mixed strategy is likely to make managing the supply chain even more complicated.
Robert Schwartz, a principal with Grant Thornton LLP’s Business Advisory Services, believes that the needs of the customer — and customer-driven metrics — should also drive the supply chain approach. “Organizations are getting smarter as to the concept of manufacturing centers,” Schwartz says. “There was a time when everyone wanted to offshore, but transport costs were high and delivery was taking a lot longer because the manufacturing centers were so far from the customer base. Manufacturers are paying a lot more attention to customers and their needs, and coming up with a more balanced approach, which takes customer satisfaction metrics such as quality and on-time delivery into consideration. We’re seeing more re-shoring or near-shoring of manufacturing in order to be more responsive to that.”
The hunt for elusive value
There’s a crystal-clear reason why manufacturers are allowing their supply chains to become more complex — cost. This perennial commercial priority remains the single-most widespread supply chain challenge that companies face (see Chart 2).
The importance of cost comes as no surprise to American Leather’s Duncan. “Traditionally, prices simply keep going up,” he says. In turn, our survey respondents are most likely to cite inventory optimization and cost management — effectively two sides of the same coin — as their main supply chain challenges.
But there is a catch. “Low cost” is not the same as “low price,” and the real issue has always been about value for money. If quality is rarely mentioned in our survey — only 7% see it as a leading issue — then that’s because manufacturers see it as a given. Flexibility is also essential, albeit harder to find. The supply chain’s responsiveness to changing company needs is the third-leading supply chain challenge among those surveyed, and the second-leading for those at midsized companies.
The need for a supply of new ideas
It’s no surprise that companies are looking for lower costs and greater flexibility from their supply chains. But our survey also reveals that manufacturers are using their supply chains to pursue something more fundamental to their survival — innovation in a sector that relies on fresh ideas.
Respondents say their second-largest driver of business model innovation in the past three years was changing partner and supplier capability. This makes the supply chain a bigger driver of innovation than new technology, and the second-biggest driver after customer demand. Similarly, increased collaboration with suppliers — to create new or improved products — was the second-most common way that businesses repositioned themselves in the market in recent years.
Could it be that companies will soon look to their suppliers as much for new ideas as they do for a good price on products? David Kazyak, VP for global engineering at Lear, a car-seat manufacturer, appears to think so. He says his company’s approach is to “consistently challenge and leverage our suppliers to bring us new technology and innovative development that we can then incorporate into our products. From a technology or product development standpoint, they are very important.”
Martin Richenhagen, CEO of AGCO, a farm equipment maker, reports a similar dynamic: “The supplier comes in with proposals and their know-how, and then it’s a very cross-functional approach among engineering, the supplier, purchasing and manufacturing.” But Richenhagen also cautions that such cooperation results from an intensive relationship with strategic suppliers. Inevitably, there are limits to the number of external suppliers with which a company can have this level of interaction.
It also makes sense to innovate with local suppliers. “Everything from the response time down to language is much easier than trying to do a new mechanism with someone offshore,” says American Leather’s Duncan.
When going global doesn’t mean going cheap
Intensive relationships with suppliers may lead to innovation, but many manufacturers — such as those buying commoditized goods — will always favor a straightforward low-cost strategy. The question then comes down to local versus global.
In recent decades, many have assumed that buying cheap means going to the least cost overseas market. But the tide of public opinion is changing, as Duncan explains. “Until people tried going offshore,” he says, “maybe they didn’t fully appreciate the hidden cost of importing things from Asia or wherever, and that there are efficiencies to having your supplier local.”
Neal Fenwick, CFO at ACCO Brands, an office supplies producer, agrees with this assessment. “We’re part of the trend of moving things back from China,” he says. “We’d outsourced the majority of dry erase boards, for example, even though they have high freight costs. But with changing dynamics, freight costs going up, labor costs in China going up significantly, the variation that you get in U.S. imports, port strikes, etc., we’ve significantly swung back to manufacturing those in the U.S.”
For many parts, however, least cost country sourcing remains the best option. Take Overhead Doors, a garage door company. John Wilson, the firm’s CFO, says they get their most significant raw materials from suppliers in America but “get components, nuts and bolts from China. I don’t think we’ll bring those sorts of parts back here, but we wouldn’t rush to send other requirements offshore either.”
Toward the “both/and” approach
Along with deciding on a local or global strategy, one of the other great procurement dilemmas comes down to choosing how many suppliers to work with. Do we go after the lowest price from a large pool of suppliers — or do we build mutually beneficial partnerships with a select group?
Today, many can no longer afford to pick one over the other, and — as with the local or global dilemma — our respondents appear ready to take on both. Almost three-quarters (72%) of respondents expect to increase their number of suppliers overall, while only about one in 20 (6%) foresees a decrease. At the same time, nearly one-half (43%) expect to integrate their suppliers more closely with company operations — suggesting a move toward fewer, more select suppliers — compared to only 20% that integrate less.
When asked about his biggest supply chain accomplishments after a decade of innovation, Richenhagen replies: “I’m very proud of the huge number of components we’ve started to buy from lower-cost suppliers. I’m also very proud of the way we intensified strategic supply relationships in important areas.”
A “both/and” strategy seems like an obvious choice for maximizing the benefits from the supply chain. It has been less popular in the past, though, because it comes at a price that companies previously could not pay — complexity. So how are they doing it today?
Automate, reinvent and transform
For many, technology has been the key to achieving a “both/and” strategy. In the past three years, 40% of companies have used technology to completely or largely reinvent their supply chains. A further 39% have seen some change. This degree of tech-driven transformation is roughly the same as that seen in R&D and customer relations, and ahead of production and operations. Moreover, 57% expect automation to have a growing influence on their supply chains in the near future, including 76% of the largest companies.
Automation can help companies take advantage of close partnerships with a select few suppliers, as well as loose arrangements with a bigger pool. Close partners can get a transparent view of each other’s operations and inventory, allowing the purchaser’s IT systems to oversee ordering and production. This can improve resilience and make just-in-time inventory management even smoother by integrating the product flows of multiple companies.
Real-time smart automation can also help companies that want to obtain from least cost bidders. Global reverse auctions and similar e-sourcing solutions are now commonplace. Here, greater resilience can come from the breadth of the supplier pool.
Better still, automated systems have the ability to handle both approaches at once. In this way, technology can underpin the complex yet resilient supply chains that U.S. manufacturers are looking for.
Look beyond the old stumbling blocks. Balancing select close partnerships with numerous suppliers is an increasingly viable option.
Reconsider what “cheap” means in practice. Their prices may be lower, but it may be more expensive overall to source from far-flung markets.
Be open to new ideas from the supply chain. In manufacturing, innovation is vital. Don’t overlook the contribution your suppliers can make to your business’ new direction.
Know that automation may not be optional in the future. Transforming the supply chain to align with strategy will require the greater use of digital tools and automation.