by Chris Scafario, President/CEO, DVIRC
The relentless wave of disruptions in workforce, logistics, and prices has impacted all manufacturers, but it has been particularly intense for the smaller job shop doing custom batch production. These contract manufacturers may have limited connectivity within their business operations and less structured planning, let alone resources dedicated to supply chain management. They may have operated for decades with such reliable inventories and suppliers that it allowed them to follow the “have a hunch, buy a bunch” approach to materials.
Organizations thought they were being lean by keeping low inventories, but they were not tracking lead times. Long-time employees may have retired without documenting their ordering processes. So when delivery times skyrocketed for their key materials, they found themselves in crisis mode faced with:
- Working around components that are no longer available
- Onboarding suppliers without going through vendor qualification
- Reporting an unusually high number of work-in-progress mistakes
- Being forced to select lower-quality component options
- Dealing with previously unchecked departmental silos obstructing information flow
The 4 Elements of Supply Chain Management
Supply chains are among the highest costs for small manufacturers and deserve more attention. Applying structure to your supply chain and inventory management is one of the easiest improvement initiatives you can undertake. It won’t be an overnight fix – it will take time and effort. But it does not usually require a capital investment, and you don’t have to hire a bunch of people. Here are four key areas with tools to help you develop structured processes, measurements and accountability for a resilient supply chain.
Inventory management and planning
Even a small company can have silos within its business operations. Gaining visibility into your supply chain, including your own operations, is critical. You should be communicating frequently with your suppliers and customers as lead times continue to fluctuate. But as things change, how can you adjust to have the most control of your inventory amid disruptions? Here are three tools that will help you manage and plan:
- Supply chain self-assessment: A self-assessment should provide an objective, end-to-end supply chain view
including upstream (suppliers), internal (production) and downstream (channels) visibility. It reveals a snapshot of not only the organization’s current supply chain practices, but also indicates areas of opportunity to create more robust processes and a system to benchmark performance.
- Forecast accuracy: The new paradigm has demanded even small manufacturers focus on integrating sales, inventory and operations planning (SIOP) programs with their budget and forecasting effort. This is a cycle of demand planning, inventory analysis, and capacity planning. For many shops, SIOP amounts to providing structure where none may exist. The demand plan begins with a forecast from sales, where the team reviews how the projections align with company goals, the impact on production capacity, and material requirements. Operations may go back to sales and ask to validate the forecast, which is confirmed or adjusted. This process is like the glue that keeps the people of your organization together in order to move in the same direction toward financial outcomes.
- Inventory segmentation: Classify your inventory by the ABC system. The ABC system is simply identifying your parts with the greatest importance as “A” parts, and those with the least importance as “C” parts. Depending on how items are categorized, they will require different inventory management practices. “A” items tend to flow through the operation the fastest and have the most value. You should prioritize your planning for those parts. The next step is doing regular cycle counts to make sure your inventory is accurate. You don’t have to do cycle counts at the same frequency for all your parts. A suggested starting point is to count “A” parts every month, “B” parts once a quarter and “C” parts every six months.
Supplier relations and supply chain management
This not only reveals your vulnerabilities, but also begins your staged planning. Focusing on integrating your SIOP will help you with forecasting accuracy, but you will also need to look at your suppliers. You should gather data on every part you purchase since you can’t improve what you don’t know. Ideally, you will determine things like the supplier’s lead time from order to arrival, and whether they consistently deliver on time. You’ll look at transportation time, freight costs, quality of items, and whether each supplier is agile and able to adjust to changes in schedules or orders. The data will be invaluable in developing the rest of your plan. Tools to help you in this area include:
- Supplier scorecard: It’s important to evaluate suppliers in the beginning of the solicitation phase and then continuously evaluate their performance. This will help you measure the effectiveness of each supplier. You want to make sure that the supplier is still meeting your expectations over time and discuss their performance with them frequently. Implementing a scorecard will help ensure that suppliers are performing to organizational requirements and additionally allow for organizations to create performance thresholds to trigger when to research alternative suppliers.
- Total cost of ownership: Traditionally, the price of materials and quoted information has been the primary data point for evaluating potential suppliers. However, total cost of ownership (TCO) offers a more complete perspective on the cost of sourced material. When you calculate TCO, you include overhead expenses, such as the cost of managing overseas suppliers, the balance sheet (i.e., higher inventory costs), risks including lost sales and poor customer experience, and other external and internal business considerations. It is a more integrated view that takes into account freight, tariffs and lead time.
- Strategic sourcing matrix: This matrix will help you to create efficiency and manage risk across all activities in your supply chain. The matrix categorizes products in terms of profit contribution and supply chain risk. Managing an efficient supply chain requires an understanding of the total cost of ownership and how it impacts your strategic sourcing process.
Finding and vetting suppliers
Finding the right suppliers can be a challenge for manufacturers of all sizes, especially for resource-challenged manufacturers who are occupied with their own day-to-day operations. Manufacturers should seek to manage their supply chain risk and move from reactive to proactive with long-term contingency plans, second-sourcing to build in redundancy, and researching their existing suppliers. A deeper understanding of your suppliers can improve quality control, flexibility and time to market, while lowering supply chain risk. Here are two tools to help find and vet suppliers:
- Supplier scouting: MEP National Network Supplier Scouting can be applied on a national, regional or local scale. By leveraging extensive relationships and knowledge of U.S. manufacturing capabilities, MEP Centers identify manufacturers with specific production and technical capabilities, and connect them with supply chains of other companies and government agencies at no cost. Additionally, MEP Centers identify and connect suppliers with purchasers, responding to the specific needs of individual companies or agencies.
- PESTLE analysis: PESTLE is an acronym for political, economic, social, technological, legal and environmental. This framework looks at all the external factors that could impact your suppliers, leading to supply chain disruption. Research your suppliers to understand inherent risks associated with the company and external factors. By examining how each of these factors could positively or negatively impact your supplier, you can better manage your supply chain risk.
Prioritizing and planning
The old adage, what gets measured, gets managed is especially true when it comes to your supply chain. Set key performance indicators (KPIs) that keep your company, and your supply chain, on track and moving forward. Small manufacturers who have avoided or quickly responded to supply chain issues have often found opportunities to increase their margins and grow. Use the tools below to manage and measure your supply chain improvement initiative:
- SMART goals: Many smaller manufacturers struggle to put structure around how they target new opportunities or initiatives. SMART (specific, measurable, achievable, relevant, and time-bound) goals help align your team, and provide a structure and pathway to a more resilient supply chain.
- Supply chain KPI analysis: Your company is likely already tracking KPIs for certain business processes. The same approach should be used to improve your logistics processes. Your metrics should align with company priorities and may include areas such as quality, innovation and on-time delivery. It’s always helpful to choose a small number of KPIs so you can identify potential bottlenecks without getting overwhelmed with metrics.
Sidebar: DVIRC is facilitating a virtual Supply Chain 101 Series (no-cost for PA manufacturers) starting on March 27. See nwirc.org/events for details.