The pandemic sent numerous shock waves through the world of small and medium- sized manufacturers (SMMs), and perhaps the most lasting have been disruptions and changes in the global supply chain. SMMs are now dealing with the reality that uncertainty is now part of a recipe for running a successful business.
Among those uncertainties is when, or even if, the supply chain will return to its previous level of stability. Having few alternatives to ocean freight is just one of many reasons that experts are predicting supply chain issues may last into 2023. Even then, higher ocean freight costs may be here to stay.
A Different Way of Evaluating Risk
Supply chain issues rarely can be viewed as black and white by SMMs because there are so many dependencies, both upstream and downstream, into and out of an SMM’s facility. In the past eighteen months, some of the “what if” risks have become reality, leading SMMs into new territory. While cost will always be a critical factor in finding both suppliers and customers, it’s no longer the main consideration. SMMs are now looking at how they can balance cost with risk and supply chain resilience. Costs of materials or parts become less important when a product can’t be produced and delivered which ultimately causes delays to customers.
Supply chain issues now are being viewed much more strategically – in somewhat of a business insurance mindset. Reducing uncertainty comes at a cost. There are always trade-offs. But the efforts to find domestic products and capabilities are also shedding light on the many benefits that SMMs might not have considered in the past.
Benefits of Domestic Sourcing and Reshoring
Many SMMs are pursuing domestic sourcing for materials and supplies. These efforts also are referred to as supplier scouting, which is not new but previously has been viewed from more of a tactical, problem-solving perspective. And while many SMMs are urgently looking to resolve ongoing supply chain issues, there is a significant shift in mindsets regarding supplier scouting.
Supplier scouting is increasingly being used for long-term domestic sourcing and second sourcing, which minimizes risk while increasing options. The most obvious benefit of using domestic sourcing for materials and parts instead of overseas suppliers is that risk management begins much earlier in the entire process. The farther a part or material must travel, and the more touch points involved, the greater the risk.
In one recent example from global supply chain disruptions, a manufacturer was paying $5,000 per roll for material and shipping from China, but delays in shipping forced them to use air freight instead of ocean freight, which raised the cost of just the shipping to $7,500. The manufacturer is now trying to reshore that base material and source it domestically.
Reshoring also is an opportunity to align your supply chain with business success. The benefits of domestic sourcing include:
- Reliability: Overseas suppliers means living with tariffs, global politics and economies and natural disasters in faraway places.
- Trust: It’s easier to establish a relationship with common languages, cultures and proximity, and relationships become critical during disruptions. Relationships are key in understanding if a supplier can grow with your business and innovate alongside you.
- Business Ethics: Concerns about overseas suppliers with intellectual property (IP), knockoffs and tooling are well documented. The U.S. has some of the strongest IP protections in the world, so working with a domestic supplier decreases the chances of IP theft.
- Total Cost of Ownership (TCO): Costs are the reason SMMs use overseas suppliers to begin with – materials and workforce are significantly less expensive in Asia on a per unit cost basis. But part of the strategic shift is from SMMs realizing that the costs are considerable for freight, tariffs and time. Looking at the true – rather than just the per unit purchase cost – which includes overhead, balance sheet, risks, corporate strategy and other external and internal business considerations can help SMMs better evaluate sourcing.
Better Information Will Support Planning
One strategic approach to managing risks and minimizing supply chain gaps is a cross-department process known as SIOP – sales, inventory and operations planning. This is a cycle of forecasting, demand planning and capacity planning.
The demand plan begins with a forecast from sales, how it fits into company goals and capacity issues. This impacts material requirements. Knowing what is in the pipeline every month helps decision makers share knowledge about risks and what risks may be tolerable.
The operations side uses the demand plan to create a supply plan that considers both the capacity and resources available. They may go back to sales and ask to validate the forecast, which is confirmed or adjusted.
The SIOP process amounts to a monthly or quarterly cycle of:
- Demand planning
- Capacity planning
- Supply planning
- Sharing information with stakeholders
- Aligning the financial forecast with the business forecast
- Exposing any supply chain risks
- Action plans to mitigate risks
Accuracy in forecasting can be as much of an art as a science in many industries. But it is hard to make strategic decisions if your forecasting is at 50 percent accuracy. Eighty percent accuracy would be great; 70 percent works for many companies. But the better information you have, the better your situational awareness, and the better your ability to proactively address supplies, and the more predictable your supply chain can become.
What SMMs Can Do To Get Started With Supply Chain Strategy
Education is important for supply chain management, or any other facet of business, and focus, time and energy are big hurdles. Know what you don’t know so you can get started with a simple three-step plan:
- Educate your team
- Find a trusted advisor
- Develop a plan
Bringing in an expert helps from a commitment perspective, and they often have a program or template to work from. They will help you analyze your supply chain to assess risks and cost drivers and identify opportunities.
As you expand your supply chain management, you can bring in more expertise, whether it is on a project basis or with a specialist employee.
For more information about supply chain management or to find domestic suppliers or capabilities, connect with your local MEP Center.
About the author
Gary Steinberg is Supply Chain Advisor for the California Manufacturing Technology Consulting, part of the MEP National NetworkTM. He is a global supply chain specialist with extensive experience in high tech, computer, electronics, and aerospace industries.
