Coping with Supply Disruption and Demand Volatility
Manufacturers are currently experiencing unprecedented disruption of the supply chain on both the supplier side and the customer side.
Manufacturers are experiencing unprecedented disruption of the supply chain on both the supplier side and the customer side. Sources of raw materials and parts have become unreliable, and shipments have been delayed during the pandemic. Shipping costs have skyrocketed. Customer expectations for delivery and service rise higher and higher, while demand often has become volatile.
Consultant Lisa Anderson, president of LMA Consulting Group Inc., works with manufacturers and distributors to develop strategies for supply chain management. In this interview, she offers guidance on coping with the current turmoil and its effect on manufacturers, their suppliers and their customers.
VALVE MAGAZINE: What is the supply chain?
LISA ANDERSON: The supply chain connects the manufacturing, transportation and distribution processes that get product from the initial suppliers through manufacturing—which may include multiple steps—to the final customer. So, if you’re a manufacturer, the supply chain starts with your supplier’s supplier and goes through you to your customer’s customer.
VM: What new ways of working are coming to the fore in a post-COVID-19 world?
LA: Manufacturers must be more resilient, innovative and responsive with regard to changing conditions, including customers’ shifting needs for products and levels of service.
To adapt, some folks are looking at producing closer to the customer so they can be more responsive to fluctuating customer conditions.
We’re also looking at utilizing more technology that gives visibility into our supply chains. Part of becoming more resilient is having better knowledge of your suppliers, processes and customers.
VM: What kind of technology are we talking about?
LA: AI—artificial intelligence—is hot and so is the Industrial Internet of Things (IIoT). At a manufacturing company these technologies can enable a transition to predictive maintenance rather than preventive maintenance, for example.
A company’s ERP (enterprise resource planning) system, a necessity in manufacturing today, allows visibility of your whole operation and aids in making purchasing and other decisions. An ERP system can take advantage of those other technologies, as well.
To anticipate customer demand, we could look at historical demand, but then the pandemic changed everything. But we can look at predictions: our sales forecasts and predictive analytics. Those relate to AI, and somewhat to IIoT if we’re able to connect with customers at that level.
VM: How do you get visibility into your supply and what your customers need?
LA: On the supply side, you want to know if your materials are on the way to you. Where are they? You could have access to GPS data about the truck or the boat carrying the materials. Maybe they got sidetracked—everything is getting rerouted lately.
On the customer side, let’s say you’re a valve manufacturer and your customer is an oil refinery. The refinery would be connected by IIoT and use an ERP system. With access to data, you could see that this customer is going to need a new valve, how many valves they have in inventory or how many valves they are using on a weekly basis. That’s giving a better picture of the demand.
VM: Are customers willing to share that kind of data?
LA: I think the answer is yes. It depends on how you position the conversation, of course. You can say, “I’d really like to understand more about what you have in inventory and get regular updates because I want to be resilient on my end and communicate with my suppliers so I can better serve you.” If you say it like that, then the answer is likely to be yes. How would you get the information? It could be through electronic data interchange (EDI) or through a portal. But the information could be sent in an email, if all else fails.
VM: In a post-COVID-19 world, what traditional techniques or ways of working will we have to put aside?
LA: From a supply chain point of view, if you were already utilizing best practices, probably not much needs to change. But, in my experience, most manufacturers have not been using those best practices.
Supply chain disruptions are now commonplace. We have to think about how we’re going to account for and adapt to those risks in our supply chain design, whether it’s sourcing differently, partnering with other companies or using other approaches.
VM: Are supply chain professionals going to look at expanding their local supply base again, after the previous push to buy from China and other low-cost-production countries?
LA: There’s definitely a surge in terms of reshoring and producing in a local or regional way, for a lot of reasons. We need to keep up with customers’ changing demand. If possible, you want to be closer to the customer to reduce lead times. Then, there’s a trend toward clusters where suppliers and manufacturers are located more closely together in a region. The region could be very small or it could be large, like North America.
VM: How can supply chain teams manage the balance between achieving greater cost savings without compromising on quality?
LA: That is definitely an issue with sourcing components from faraway suppliers. It’s not even just the quality. It’s also the lead time and the ability to make changes. Companies are finding that the labor cost component is not as significant as it used to be, especially taking into consideration the recent tenfold increase in ocean freight costs. Except for commodity products, there are more and more reasons to look for sources closer to home. The question is: Who can you partner with? You may find suppliers in Mexico, if you are a U.S. manufacturer, or even within your own state.
VM: How can a company increase its resilience in the face of all the chaos?
LA: I think those that are going to be successful coming out of this pandemic are the ones that actually have the raw material and parts because lead times are going way out—what used to take four weeks is taking 14 and what used to take 14 weeks is taking 26. It can come down to sourcing items closer or holding inventory. However, these days, suppliers don’t even have the time to build inventory.
If you’re dependent on a faraway vendor for a key material, a key casting or any vital supply, get on top of that right away. Find out what resources your suppliers have because you may need to find some additional sources. What I’m hearing across the board is that a lot of companies are in deep trouble. The ones that are succeeding find innovative ways to cope: locate new sources, produce in house, partner with another company. It’s not simple, but it needs to be done.
If you continue to use a faraway supplier, make sure that you have a backup source of supply that’s not located in the same place as your primary supplier. For example, if both your primary and backup suppliers had been in Wuhan, China, that would obviously have been bad. On the other hand, for some of my clients whose primary source was in China, having a backup source in India didn’t help, either.
Be sure to have a backup source in a location not affected by the same kinds of problems as your primary supplier’s area. Then, you also need to treat the backup not like a backup. You have to get at least 20% of your volume from the backup supplier all along, to make sure they’re ready for you when you need them. VM
Lisa Anderson, MBA, CSCP, CLTD, is ranked #16 in SAP’s Supply Chain Influencers. She is the founder and president of LMA Consulting Group Inc., a consulting firm that specializes in manufacturing strategy and end-to-end supply chain transformation that maximizes the customer experience and enables profitable, scalable, dramatic business growth.
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