Supply Chain Risk
The recent Coronavirus outbreak continues to threaten millions of people in China and its reach is growing. But, there is more at risk than the toll on human health. There are also economic implications, and those tentacles are spreading into many industries threatening to disrupt operations on a global level.
Just like any widespread disaster, whether an affliction by Mother Nature or human-made, there are detrimental consequences, and the Coronavirus is no exception. Chinese industries are taking the biggest hit, and worldwide supply chains may soon be feeling the impact. Amongst the companies that will inevitably encounter the most significant blows are those in the automobile and electronics manufacturing industries.
To gain a clearer picture of why these industries face imminent disruptions, consider the location of the original outbreak, Wuhan, the largest city in the Hubei province. Wuhan has been a traditional manufacturing hub for decades, and in 2018 it produced a GDP of US $224 billion. Furthermore, it is home to the automobile manufacturers, Dongfeng Motor Corporation, General Motors, and Honda Motors. According to Ron Keith, Executive Director and Founder of Supply Chain Resources Group, 54% of electronic products (by value) are produced in 2.8M factories across China. And if the virus keeps spreading, many more in the industrial manufacturing sector will be affected.
The Chinese New Year factory shutdowns are now extended due to the virus outbreak and it may result in supply shortages. These closures leave companies that are dependent on Chinese parts and components economically vulnerable. Global companies must now evaluate their current supply chain and inventory management systems to remain competitive and to mitigate future risk.
Advantages of a Diverse Supply Chain
The best defense against any economic disrupter is strengthening the supply chain through muti-sourcing. When factories reopen, there will be a higher demand for products and their components. Although there are other areas in China where manufacturing plants are still up and running, they are also affected by travel bans. Airfreight services are declining as airlines restrict flights in and out of many major Chinese cities. When Chinese factories are back to operating at full capacity, it will take a while to ramp up their production to make up for the losses. Therefore, seeking other manufacturing partners may prove to be necessary. Apple learned that lesson after the 2011 earthquake in Japan, which is a major supplier of its products. They have since turned to dual-sourcing for products to protect against disruption. Many American domestic suppliers are already preparing for flexibility in its production line to accommodate potential volume increases.
Companies that choose multi-sourcing may see an added benefit of price reductions. An increase in proposals can incite price competition among vendors resulting in lower prices for those seeking new suppliers. A study by the Hackett Group found that those with a diverse supply chain had lower overall operating costs and spent 20% less on buying.
Purchasing priorities may have to change in order to prepare for shortages. Although the rise of lean manufacturing processes has resulted in lower inventories, maintaining higher reserves may prove to be beneficial to prevent future supplier risk.
If your business relies on a single supplier, then what happens when the supplier shuts down operations from either a financial or natural disaster? Moreover, what if the supplier decides to take on a more significant customer and your company is no longer a high priority? Relying on a single, rather than multiple suppliers can send a message that you are a risk to your customers.
During times of supply chain uncertainty, companies may need to evaluate their needs and put effective strategies in place. For example, is price more crucial, or is it speed? In the current situation, the Coronavirus is posing a threat to inventories. Finding a manufacturer partner who can deliver on speed is the best option. On the contrary, there may be times when pricing is a priority, for instance, if a company is changing its business model or experiencing financial difficulties. For this reason, it may be necessary to retain both types of suppliers, one that can deliver on each cost or speed.
Including a diversity of small, medium, and large suppliers may also be beneficial. For example, smaller suppliers are generally more attentive than larger companies. Conversely, larger suppliers may have more capacity for large volume production needs.
What is a valued manufacturing supply chain partner?
When choosing a vendor, there are some crucial factors to consider in the vetting process, and these include experience, responsiveness, efficient operations, flexible scheduling, and location. While all of these elements are important to quality, product development budgets, and well-managed inventories, the real value is in the customer experience. Customers are looking for supply chain partners who are responsive, solution-oriented, flexible, and transparent; all of these attributes help a company protect its brand and increase profitability.
Customer Experience – The New Manufacturing Business Model
Traditionally, the manufacturing industry has placed its primary focus on churning out the most parts as possible with a quick turnaround, providing low prices, and investing in new machining technologies. These benefits are integral to every suppliers’ value-proposition and are important to the industries they serve. However, we live in the digital manufacturing age where machine learning, IoT, inventory management software, CRM software, and Kanban procedures are making the product life cycle more efficient and data-driven.
What does this mean for the customer? Digitization increases supplier responsiveness and transparency. Customers get updates in real-time. This type of support is driving real value to companies who are looking for supply partners who can deliver on this value proposition.
Diversifying the supply chain is the best insurance against the threats of virus outbreaks, climate change, geopolitical disruptions and trade tariffs, or any other mitigating factors that affect cost in the short or long term. We live in unpredictable times. Is your supply chain protected?