First published at blog.ifs.com. Written by Colin Elkins, Vice President Manufacturing Industries, IFS.
When a cardiologist puts a patient through a stress test, they can see how the heart functions under load, and diagnose medical conditions. Government regulators may also use modelling techniques to conduct stress tests on banking institutions to ensure they could remain solvent in times of high unemployment or a recession.
Right now, many businesses—and most notably many manufacturing supply chains—are undergoing a stress test. But this is not in a clinical environment, or in an abstract computer model. This is the real thing, and we can see some of the links in our supply chain straining or even breaking. Now is the time to identify these weak links, fix them and come back stronger.
Even in manufacturing sectors where demand has remained strong—like food—farmers are dumping milk and breaking eggs they cannot sell to their supply chains, which rely heavily on institutional and restaurant distribution. As restaurants and institutions shut down during lockdown, product is wasted even as retail purchases of milk and price of milk at the cash register rise. Clearly, the division between institutional food processors and those serving retail outlets is a weakness in the food supply chain exacerbated by the fact that packaging between the two channels is so different. As pointed out by the editorial team at RealAgriculture.com, “restaurants buy in barrels, not small tubs or one pound blocks.” Clearly, manufacturers need to plan for rapid change in the configuration of their products or these shifts in demand pattern between institutional and retail outlets will result in lost food and potentially hungry people.
In other sectors, manufacturers including Sony have seen a double-whammy of demand shocks in countries affected by mandated retail closures as well as shutdowns of its manufacturing facilities in China and Malaysia. Frost and Sullivan identifies a number of negative impacts the pandemic is having on extended global supply chains, including diminished productive output from China … “delayed orders, port calls, and blank sailings have escalated volume pressures on the containerized supply chain,” they write.
Supply chain data company Asset Compliance has even created a free tool to help manufacturers identify what parts of their supply chains are currently vulnerable by comparing supplier lists with World Health Organization (WHO) data.
Supply chain resilience
Even before the onset of the COVID-19 pandemic, Sony and Harley Davidson were among a number of companies working to move manufacturing operations from China, to other nations including Vietnam, Indonesia and Thailand. That move was triggered by increasing duties imposed on goods imported to the United States from China. Making reactive moves in response to a sudden increase in landed cost is of course necessary in a situation like this one. But what if manufacturers could build resiliency into their supply chains so they could avoid disruptions caused by natural disasters and policy fluctuations?
Part of the solution is application of basic concepts like the Pareto Principal, and manufacturers could do well for instance to source 80 percent of their purchases for a given part or material from global vendors in one country while paying a higher price for 20 percent of their parts from a domestic supplier. In the case of a global supply chain disruption, there is an existing relationship with a domestic partner, with all letters of credit, operating agreements, established pricing and other supplier elements in place. This also helps maintain domestic capacity that perhaps would wither if price—absent a weighting factor for supply chain risk—were the only criteria in purchasing decisions.
Coming up with solutions to supply chain disruption on the fly is possible—even now, people in the UK are signing up to “pick for Britain”— to pick crops so food can get to market in the wake of a disruption in supply of migrant workers. Manufacturers involved in mission-critical products required to fight the pandemic are taking extreme measures, in some cases giving away their intellectual property for free to maximize production of ventilators, for instance. They are participating in government portals designed to coordinate the pandemic response. Dyson even rapidly designed and reconfigured their manufacturing capacity to produce ventilators. If Dyson can rapidly retool its operation to produce a net new product, how quickly should food manufacturers be able to reconfigure their packaging line to increase products available in retail packaging? I guess we’ll find out.
But ideally, manufacturers should be able to model, analyse and plan for supply chain risk that can result from disruptions caused by a global pandemic, natural disaster, trade dispute or armed conflict.
How software can help
Enterprise applications like enterprise resource planning (ERP) software must support supply chain and manufacturing decision makers as they identify and mitigate risks across their organization—including in supplier relationships. ERP should include embedded tools to:
- Analyse periodized performance history to identify risk profiles of suppliers
- Define risks by type, analysis categories, probabilities, impact levels and other criteria
- Connect risks to projects and contracts
- Identify consequences and potential responses as risks manifest themselves
- Manage risk mitigation actions, review results and revise risk management plans accordingly
For manufacturers that operate their own manufacturing facilities in multiple countries, enterprise asset management (EAM) software should be used to evaluate potential investment, disinvestment, expansion and refit decisions in such a way as to balance production capacity across facilities or move production away from higher risk environments. ERP software should also give manufacturers the ability to proactively manage their supplier relationships so they can mitigate risk.