Many supply chains will remain unsettled through 2021, and some of the biggest, most sophisticated global manufacturers are affected. It’s been headline news that most automakers are slowing production because they can’t get the microchips they need. In the worst cases, some manufacturers will produce only half of their capacity in the coming months.
And yet, at least one Japanese automaker says its production won’t be affected because it has a four-month supply of these critical components on hand.
Clairvoyance, a fluke or exceptionally good luck?
None of the above, actually. These critical parts come from only a few foundries in Hong Kong and Taiwan, and this automaker understands the threats endemic to that region. It also calculated that the carrying costs of a four-month supply of chips isn’t all that high. So it stocked up, just in case. It did so with another.
The company didn’t take the same approach with many other components, ranging from glass and leather to the myriad subassemblies that go into cars. It had multiple sources for these materials, and the risk of those supplies failing to appear on time was low.
Granted, that simplified explanation belies the intense statistical analysis that carmakers apply to their supply chains. But it is a useful anecdote to illustrate the need for differentiated supplier management.
Point is, when a necessary component is available from only a limited number of suppliers in a small geographic area, companies should carry more safety stock. That is, unless that supply chain hadn’t been substantially disrupted in decades, as was more or less the case for chips and other raw materials and finished goods coming from Pacific Rim countries.
A tanker blocking the Suez Canal. Brexit. A ransomware attack shutting down a major petroleum pipeline. Nobody would blame a supply chain manager for dismissing risks not seen in years, or ever. And if you had foreseen and presented a case to buy a few months’ worth of chips, leaders in the throes of the just-in-time craze would likely have dismissed your concerns as improbable — in which case, Scarlett Johansson or Morgan Freeman will play you in the upcoming sci-fi blockbuster about the one lone manager who knew a disaster was looming.
Big manufacturers know all about supply chain diversification. In our example, above, Hong Kong and Taiwan are just 450 miles apart in the South China Sea. The political environment alone should be cause for significant concern. Whether you take a highly rigorous statistical approach or rely on your teams’ understanding of your supply chain, there’s a clear mandate to diversify if you can, hold more safety stock if you can’t. Geographic diversification is a first line of defense for critical supplies, and the time to develop those relationships is before there’s a crisis.
An obsession with just-in-time inventory — getting components in the door just before they’re needed on the line — is both ingrained and increasingly old-school. When critical items are not available from multiple suppliers in geographically diverse parts of the world, carrying a larger stock of those items — a hybridized just-in-case model — is now the norm for big manufacturers and should be for shops of all sizes.
Of course, you need to weigh carrying costs. A few months’ supply of microchips could probably fit in the automaker CEO’s conference room. Not so with most of the components it takes to make a car. And for most companies, carrying months of inventory of anything will impact cash flow. CFOs will want to bring a careful analysis to bear, but going forward, we expect a hybrid JIC/JIT inventory management strategy to become the norm. In the real world, it’s not one or the other.
|A “push” system in which inventory purchases aren’t based on actual current demand.||A “pull” system in which inventory is essentially purchased to order.|
|Focuses on maximizing flexibility with less concern for capital application.||Focuses on minimizing inventory and using capital efficiently.|
|Excess inventory is kept on-hand to avoid running out due to supplier delays or demand spikes.||Inventory is purchased only to meet immediate production or sales needs.|
|Companies generally make larger, more expensive inventory orders.||Less working capital is required because inventory purchases occur in smaller batches.|
|Valuable when demand is unpredictable or suppliers are unreliable.||Works best when demand is stable and suppliers are highly dependable.|
|Demand forecasting is less critical as long as there is enough inventory to meet the highest demand.||Requires accurate demand forecasts to avoid over- or under-buying inventory.|
If critical stock is an issue and carrying costs threaten margins, it’s time to prioritize. The 80/20 rule states that 80% of results — sales, and more importantly, profits — come from 20% of efforts, customers or another unit of measurement, often a comparatively small set of products or services.
An ABC inventory analysis exercise, in which you group SKUs based on demand, cost and risk data, will typically reveal production priorities. Companies with a good grasp of unit economics tend to gain significant clarity. Hopefully, implementing systems and gathering data to better manage demand planning and supply chains, create forecasts and understand unit economics were part of your work in 2020. If not, now is the time.
More Supply Chain Resources From NetSuite
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